Question

Connors Corporation acquired manufacturing equipment for use in its assembly line. Below are four independent situations relating to the acquisition of the equipment.
"A. The equipment was purchased on account for $40,000. Credit terms were 2/10, n/30. Payment was made within the discount period and the company records the purchases of equipment net of discounts.
B. Connors gave the seller a noninterest-bearing note. The note required payment of $42,000 one year from date of purchase. The fair value of the equipment is not determinable. An interest rate of 12% properly reflects the time value of money in this situation.
C. Connors traded in old equipment that had a book value of $13,500 (original cost of $29,000 and accumulated depreciation of $15,500) and paid cash of $37,000. The old equipment had a fair value of $8,500 on the date of the exchange. The exchange has commercial substance.
D. Connors issued 2,500 shares of its no-par common stock in exchange for the equipment. The market value of the common stock was not determinable. The equipment could have been purchased for $40,000 in cash."

Answer 1

Answer:

A: we reocrd at cost, which is the discounted price:

40,000 x (1 - 2%) = 39,200

Equipment 39,200 debit

          Cash               39,200 credit

B: we discount the note implicit interest:

42,000 / 1.12 = 37,500

Equipment    37,500 debit

    Note payables          37,500 credit

C: Because; there is commercial substance we recognize the loss on the old equipment as the book value is 13,500 while it is being traded at 8,500

We write off, post the cash used and the loss. The new equipment enter the accounting for the difference to blaance the entry:

equipment           45,500 debit

acc depreciation 15,500 debit

loss at disposal    5,000 debit

                 cash         37,000 credit

                 equipment 29,000 credit

D: we evaluate the equipment at fair value

Equipment      40,000 debit

  common stock              2,500            credit

  additional paid-in         37,500           credit

We now it is no-par therefore there is an additional paid in.

As we aren't provide with the face value we assume is 1 dollar.

Explanation: