The questions to be answered are:
Week 1
Tea Tree Bay Ltd acquires a Gizmo Machine from Jetsons Ltd for
the following consideration:
Cash $20,000
Land In the books of Tea Tree Bay Ltd the land is recorded at
its cost of $100,000. It has a fair value of $140,000.
Equipment: In the books of Tea Tree Bay Ltd the equipment is
recorded at a cost of $50,000. The equipment has an accumulated
depreciation balance of $20,000. The fair value of the equipment is
$23,000
Assumption of liability
Other associated costs
Tea Tree Bay Ltd also agrees to assume the liability of
Jetsons Ltd’s bank loan of $30,000 as part of the Gizmo Machine
acquisition.
Tea Tree Bay Ltd also spend $5,000 as the installation cost.
Testing cost was $2,500. Transportation cost for the machine was
$700.
During first year of operation, the company paid $650 as the
maintenance cost for the machine.
Required:
a) Calculate the acquisition cost of the Gizmo Machine that
will be used as the base for future
depreciation charge.
b) Provide the journal entries that would appear in Tea Tree
Bay Ltd’s books to account for the
acquisition of the Gizmo Machine.
c) Will the maintenance cost be included in the acquisition
cost of the machine? Justify your answer.