Question

Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows:

Total cash paid $2,990,000

Assets acquired:

Land $600,000

Building $600,000

Machinery $500,000

Patents $600,000

The building is depreciated using the double-declining balance method. Other information is:

Salvage value $60,000

Estimated useful life in years 30

The machinery is depreciated using the units-of-production method. Other information is:

Salvage value, percentage of cost 10%

Estimated total production output in units 400,000

Actual production in units was as follows: 2019: 40,000

2020: 80,000

2021: 120,000

The patents are amortized on a straight-line basis. They have no salvage value.

Estimated useful life of patents in years 20

On December 31, 2020, the value of the patents was estimated to be $900,000

Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31.

The machinery was traded on December 2, 2021 for new machinery. Other information is:

Fair value of old machinery $240,000

Trade-in allowance $336,000

List price for new machinery $504,000

Estimated useful life of new machinery in years 20

Estimated salvage value of new machinery $15,120

The new machinery if depreciated using the stright-line method and ½ year rule.

On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows:

Amount of addition, paid in cash $100,000

Number of years of useful life from 2023 (original machinery and addition): 20

Salvage value, percentage of addition 10%

Required: Prepare journal entries to record:

1 The purchase of the assets of Coffee.

2 Depreciation and amortization expense on the purchased assets for 2019.

3 The decline (if any) in value of the patents at December 31, 2020.

4 The trade-in of the old machinery and purchase of the new machinery.

5 Depreciation on the new machinery for 2021.

6 Cost of the addition to the machinery on August 14, 2023.

7 Depreciation on the new machinery for 2023.

Answer 1

1.

01-Jan-19
Land	Debit	600,000
Building	Debit	600,000
Machinery	Debit	500,000
Patents	Debit	600,000
Goodwill	Debit	690,000	Balancing Figure is Goodwill
Cash	Credit	2,990,000

2.

Depreciation on Building

Building Cost	=	600,000
Salvage Value	=	60,000
Life	=	30 Years
Depreciable Cost	=	600,000 - 60,000
	=	540,000
Rate of Depreciation under SLM	=	(1*100)/30
	=	3.33%
Rate of Depreciation under Double Declining	=	2 X 3.33%
	=	6.67%
Depreciation on building for 2019
	=	600,000 X 6.67%
	=	40,000.00

Depreciation on Machinery

Machine Cost	=	500,000
Salvage Value	=	50,000
Life	=	30 Years
Depreciable Cost	=	500,000 - 50,000
	=	450,000
Depreciation per unit	=	450,00/400,000
	=	1.125
Depreciation on machine for 2019
	=	40,000 X 1.125
	=	45,000

Amortization of patents

Patents Cost	=	600,000
Salvage Value	=	-
Life	=	20 Years
Patent Amortization for 2019
	=	600,000 /20
	=	30,000

Debit Depreciation on Building 40,000

Debit Depreciation on Machine 45,000

Debit Patent Amortization 30,000

Credit Profit and loss Account 115,000

3. There is no decline in the value of patents. rather, the value is increased to 900,000