Question

Bramble Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Rob Joffrey, newly hired in the position of fixed-asset accountant, requested that Danny Nolte, Bramble’s controller, review the following transactions.

Transaction 1: On June 1, 2017, Bramble Company purchased equipment from Wyandot Corporation. Bramble issued a $30,800, 4-year, zero-interest-bearing note to Wyandot for the new equipment. Bramble will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 9%. Freight costs of $417 and installation costs of $460 were incurred in completing this transaction. The appropriate factors for the time value of money at a 9% rate of interest are given below. Future value of $1 for 4 periods 1.41

Future value of an ordinary annuity for 4 periods 4.57

Present value of $1 for 4 periods 0.71

Present value of an ordinary annuity for 4 periods 3.24

Transaction 2: On December 1, 2017, Bramble Company purchased several assets of Yakima Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to $216,000 and included the assets listed below. Bramble Company engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the fair values of the assets which are also presented below.

Yakima Book Value Fair Value

Inventory $62,000 $52,000

Land 40,500 77,000

Buildings 75,200 121,000

$177,700 $250,000

During its fiscal year ended May 31, 2018, Bramble incurred $7,230 for interest expense in connection with the financing of these assets.

Transaction 3: On March 1, 2018, Bramble Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Bramble intends to use the land for a parking lot.

The trucks had a combined book value of $32,390, as Bramble had recorded $19,130 of accumulated depreciation against these assets. Bramble’s purchasing agent, who has had previous dealings in the secondhand market, indicated that the trucks had a fair value of $42,140 at the time of the transaction. In addition to the trucks, Bramble Company paid $19,720 cash for the land.

(b) For each of the three transactions described above, determine the value at which Bramble Company should record the acquired assets. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places e.g. 58,971.)

Answer 1

Transaction 1:

The value at which Bramble Company should record the acquired assets is determined as below:

Value of Acquired Assets = Present Value of Note + Freight Costs + Installation Costs where Present Value of Note is arrived by using the Present value of an Ordinary Annuity for 4 periods factor.

Substituting values in the above formula, we get,

Value of Acquired Assets = 30,800/4*3.24 + 417 + 460 = $25,825

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Transaction 2:

The value at which Bramble Company should record the acquired assets is determined as below:

Value of Inventory = Total Purchase Cost*Fair Value of Inventory/Total Fair Value = 216,000*52,000/250,000 = $44,928

Value of Land = Total Purchase Cost*Fair Value of Land/Total Fair Value = 216,000*77,000/250,000 = $66,528

Value of Buildings = Total Purchase Cost*Fair Value of Buildings/Total Fair Value = 216,000*121,000/250,000 = $104,544

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Notes:

Interest cost incurred for financing the assets is a period cost and will not be included in the cost of different assets.

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Transaction 3:

The value at which Bramble Company should record the acquired assets is arrived as follows:

Value of Land = Fair Value of Trucks + Cash Paid for Land = 42,140 + 19,720 = $61,860

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Notes:

Cost of non-monetary asset (here, land) acquired in exchange having a commerical substance is recorded at its fair value (here, 42,140) in addition to cash paid (here, 19,720) to acquire such asset.