Solutions Guide: This is meant as a solutions guide. Please try reworking the questions and reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.
Oaktree Company purchased a new machine and made the following expenditures:
Purchased price $45,000
Sales tax 2,000
Freight charges for shipment of machine 700
Insurance on the machine for the first year 900
Installation of machine 1,000
The machine, including sales tax, was purchased on open account, with payment due in 30 days. The order expenditures listed above were paid in cash.
Required:
prepare the necessary journal entries to record the above expenditures.
To record the purchase of a machine.
Machine ($45,000 + $2,000 + 700 + 1,000)48,700
Accounts Payable47,000
Cash1,700
To record prepaid insurance for the machine.
Prepaid Insurance900
Cash900
2.
Semtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Semtech made the following expenditures in connection with the purchase of the land and building:
title insurance $16,000
Legal fees for drawing the contract 5,000
Pro-rated property taxes for the period after acquisition 36,000
State transfer fees 4,000
An independent appraisal estimated the fair values o the land and building, if purchased seperately, at $3.3 and $1.1 million, respectively. Shortly after acquisition, Semtech spent $82,000 to construct a parking lot and $40,000 for landscaping.
Required:
1. Determine the initial valuation of each asset Semtech acquired in these transactions.
2. Repeat requirement 1, assuming that immediately after aquisition, Semtech demolish the building. Demolition cost were $250,000 and the salvaged materials were sold fro $6,000. In addition, Semtech spend $86,000 clearing and grading the land in preparation for the construction of a new building.
Requirement 1
Cost of land and building:
Purchase price $4,000,000
Title search and insurance 16,000
Legal fees 5,000
State transfer fees 4,000
Total cost $4,025,000
Note: The pro-rated property taxes for the period after acquisition are not included in the initial valuation of the land and building. They are recorded instead as prepaid taxes and expensed over the related period.
The total is allocated to the land and building based on their relative fair values:
Asset / Fair Value / Percent of Total Fair Value / InitialValuation
(Percent x
$4,025,000)
Land / $3,300,000 / 75% / $3,018,750
Building / 1,100,000 / 25 / 1,006,250
$4,400,000 / 100% / $4,025,000
Assets:
Land $3,018,750
Building 1,006,250
Land improvements:
Parking lot 82,000
Landscaping 40,000
Requirement 2
Cost of land:
Purchase price $4,000,000
Title search and insurance 16,000
Legal fees 5,000
State transfer fees 4,000
Demolition of old building $250,000
Less: Sale of materials (6,000) 244,000
Clearing and grading costs 86,000
Total cost of land $4,355,000
Land improvements:
Parking lot 82,000
Landscaping 40,000