Question

Plant acquisitions for selected companies are as follows.

1. Pina Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of $966,000. At the time of purchase, Torres’s assets had the following book and appraisal values.

		Book Values			Appraisal Values
Land		$276,000			$207,000
Buildings		345,000			483,000
Equipment		414,000			414,000

To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.

Land		207,000
Buildings		345,000
Equipment		414,000
Cash				966,000

2. Grouper Enterprises purchased store equipment by making a $2,760 cash down payment and signing a 1-year, $31,740, 10% note payable. The purchase was recorded as follows.

Equipment		37,674
Cash				2,760
Notes Payable				31,740
Interest Payable				3,174

3. Monty Company purchased office equipment for $18,700, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:

Equipment		18,700
Cash				18,326
Purchase Discounts				374

4. Flounder Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is $37,260. The company made no entry to record the land because it had no cost basis.

5. Culver Company built a warehouse for $828,000. It could have purchased the building for $1,021,200. The controller made the following entry.

Buildings		1,021,200
Cash				828,000
Profit on Construction				193,200

Prepare the entry that should have been made at the date of each acquisition.

Answer 1

1) In this case, Pina industries Inc. should record each acquired asset at the amount calculated as follows:-

Assets	Appraisal Values
Land	$207,000
Buildings	$483,000
Equipment	$414,000
Total	$1,104,000

Now the total lump sum price of $966,000 should be allocated between all the acquired assets in the ratio of their respective appraisal values. This allocation is shown as follows:-

Land = $966,000*($207,000/$1,104,000) = $181,125

Buildings = $966,000*($483,000/$1,104,000) = $422,625

Equipment = $966,000*($414,000/$1,104,000) = $362,250

Journal Entry for acquisition (Amount in $)

Account titles	Debit	Credit
Land	181,125
Buildings	422,625
Equipment	362,250
Cash		966,000

2) In this question, the interest on Notes Payable is also included in the cost of Store Equipment. The interest is not to be capitalized in the cost of equipment therefore the correct journal entry should be as follows:-

Journal Entry for acquisition (Amount in $)

Account titles	Debit	Credit
Equipment	34,500
Notes Payable		31,740
Cash		2,760

3) As the asset is purchased and received in the company on the date of purchase, it need to be recorded in the books on the date of purchase with a corresponding liability because no cash is paid on the date of purchase. The journal entry at the time of purchase is shown as follows:-

Journal Entry for acquisition (Amount in $)

Account titles	Debit	Credit
Equipment	18,326
Accounts Payable (18,700*0.98)		18,326

4) The journal entry on the receipt of land will be as follows:-

Journal Entry (Amount in $)

Account titles	Debit	Credit
Building	37,260
Deferred Grant Revenue		37,260

5) The warehouse should be recorded in the books at its actual cost not at implied purchase value. The journal entry is shown as follows:-

Journal Entry (Amount in $)

Account titles	Debit	Credit
Warehouse	828,000
Cash		828,000