Brief Exercise 10: Stellar Company Traded A Used Welding Mac

Brief Exercise 10 10stellar Company Traded A Used Welding Machine Cos

Brief Exercise 10-10 Stellar Company traded a used welding machine (cost $10,440, accumulated depreciation $3,480) for office equipment with an estimated fair value of $5,800. Stellar also paid $3,480 cash in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Pearl Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2017. The terms of acquisition for each truck are described below:

• Truck #1 has a list price of $33,150 and is acquired for a cash payment of $30,719.
• Truck #2 has a list price of $35,360 and is acquired for a down payment of $4,420 cash and a zero-interest-bearing note with a face amount of $30,940. The note is due April 1, 2018.
• Truck #3 has a list price of $35,360. It is acquired in exchange for a computer system that Pearl carries in inventory. The computer system cost $26,520 and is normally sold by Pearl for $33,592.
• Truck #4 has a list price of $30,940. It is acquired in exchange for 920 shares of common stock in Pearl Corporation, with a par value per share of $10 and a market price of $13 per share.

Prepare the appropriate journal entries for the above transactions for Pearl Corporation.

Presented below is information related to Whispering Company:

1. On July 6, Whispering Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is: Land $396,000; Buildings $1,188,000; Equipment $792,000; Total $2,376,000. Whispering Company gave 12,500 shares of its $100 par value common stock in exchange. The stock had a market price of $252 per share on the date of the purchase.
2. Whispering Company expended the following amounts in cash between July 6 and December 15:

• Repairs to building: $99,590
• Construction of bases for equipment to be installed later: $126,240
• Driveways and parking lots: $130,410
• Remodeling of office space in building, including new partitions and walls: $171,890
• Special assessment by city on land: $18,000

Prepare entries on the books of Whispering Company for these transactions.

Whispering is on a calendar-year basis ending December 31. Compute depreciation expenses under each method for equipment purchased on October 1, 2017, with a cost of $236,430, useful life of 8 years, salvage value $13,320, estimated production of 40,200 units, and estimated hours of 20,000. During 2017, usage was 530 hours and production was 1,000 units. Rate per hour and per unit should be rounded to two decimal places.

Windsor Company sold equipment purchased for $213,120 on August 20, 2012. The equipment had an estimated useful life of 12 years and salvage value of $18,648, using straight-line depreciation. Compute depreciation for 2012, 2019, and accumulated depreciation from 2013 to 2018 under various assumptions, considering partial periods, with precise calculations for days of ownership and basis of depreciation.

Discuss briefly the evaluation of different depreciation methods outlined, focusing on their theoretical basis and simplicity.

The 2014 Annual Report of Tootsie Roll Industries reports total assets of $910.4 million, total liabilities of $219.1 million, net sales of $539.6 million, and net income of $63.8 million. Calculate the asset turnover, return on assets, and profit margin on sales for 2014.

Identify items that would be reported as intangible assets in the balance sheet from a given list, including purchased patents, trademarks, goodwill, and other research, development, and legal costs, distinguishing between amplitudes that are tangible, intangible, or not capitalized.

Selected information for Sheridan Company includes purchases and amortizables of patents, franchises, organization costs, licenses, and other assets. Calculate book value, amortization, and expenses for 2017, converting the scenarios to appropriate journal entries, especially considering impairment of asset values where applicable.

The Sage Hill Division of Santana, Inc., has net assets of $502 million as of December 31, 2017, with goodwill of $216 million and other property assets. Future cash flows are estimated at $435 million, but the division is offered for sale at $330 million. Prepare the journal entry to record potential impairment if applicable, based on these estimates.

Paper For Above instruction

The comprehensive analysis of various accounting transactions and methods described above encompasses key principles and practical applications pertinent to contemporary financial accounting. This paper aims to articulate the journal entries for asset exchange transactions, acquisition methods, depreciation calculations, impairment assessments, and financial ratio analyses, providing a robust understanding of the intricacies involved in accounting for tangible and intangible assets, as well as operational and financial evaluation.

Introduction

Financial accounting mandates precise recording of transactions to reflect the economic reality of a company's operations. The journal entries related to asset exchanges, such as the trade of a welding machine, require understanding of the fair values, accumulated depreciation, and cash flows involved. Similarly, acquisition transactions, whether by purchase or exchange, demand an assessment of fair value, installed costs, and the recognition of gains or losses. Depreciation methods influence asset valuation over time, affecting reported earnings and book value, with particular emphasis on methods like straight-line, activity-based, sum-of-the-years'-digits, and double-declining balance. Moreover, impairment assessments of long-term assets involve estimating recoverable amounts to ensure asset values are not overstated.

Asset Exchange Transactions

The exchange of a welding machine for office equipment, with cash paid, exemplifies a transaction with commercial substance, implying a change in the company's future cash flows. The journal entry requires calculating the fair value of the assets exchanged and cash paid. The fair value of the office equipment is directly given as $5,800, while the welding machine's book value can be derived as its cost less accumulated depreciation ($10,440 - $3,480 = $6,960). Recognizing that the cash paid is $3,480, the total consideration from the company's perspective considers the fair value of the office equipment plus cash paid, leading to recording the new assets and derecognizing the old asset, with any resulting gain or loss accounted for accordingly.

Acquisition of Trucks and Valuation

The acquisition of trucks through various methods—cash purchase, note, trade-in for inventory, and stock issuance—requires applying valuation principles, including fair value measurement, present value calculations, and recognition of non-cash consideration. For instance, Truck #2's zero-interest note with a face value deferred over a year must be discounted at the market rate of 8%, as the dealership’s incremental borrowing rate approximates this rate, resulting in an initial recognized amount lower than face value, with interest expense recognized over time. The truck acquired via inventory involves valuing the computer system based on its fair value or exchange value, considering Pearl's normal sale price. The issuance of stock requires valuing the stock consideration based on market price or par value, choosing the higher for recording purposes.

Impairment of Long-term Assets

Whispering Company's acquisition and subsequent expenditures reflect complexities associated with asset recognition, enhancement, and impairment. The initial acquisition involves recording assets at fair value, including land, buildings, and equipment, with improvements capitalized accordingly. Cash expenditures for repairs and installations are capitalized if they enhance the asset or extend its useful life. The purchase of equipment includes discounts and freight costs, which are added to the asset's cost. For impairment testing, the carrying amount is compared with the estimated future net cash flows; a reduction below carrying value necessitates an impairment loss. In this case, the estimated future cash flows of $435 million compared to a fair value offer suggest impairment, requiring a journal entry to reduce asset value and recognize an impairment loss.

Depreciation Methods and Calculations

Depreciation impacts financial reporting by systematically allocating the cost of tangible assets over their useful lives. Different methods serve varying purposes: the straight-line method evenly distributes depreciation, offering simplicity and predictability; activity-based methods allocate depreciation based on usage, providing accuracy in matching cost to benefit; sum-of-the-years'-digits accelerates depreciation early in an asset’s life, aligning with diminishing benefits; and double-declining balance accelerates depreciation even more, emphasizing early expense recognition. Each method has strengths and limitations, with the choice often influenced by accounting policy and operational characteristics. For assets with irregular usage or lifespan estimates, the activity method may offer the most accurate reflection, while the straight-line method is favored for its simplicity.

Financial Ratios and Analysis

The asset turnover ratio (net sales divided by average total assets) demonstrates efficiency in using assets to generate sales. Tootsie Roll’s ratio of 0.5924 indicates moderate asset utilization. Return on assets (net income divided by average total assets) shows profitability; Tootsie Roll’s ROA of 6.99% suggests efficient management of assets to generate earnings. The profit margin on sales (net income divided by net sales) at 11.83% indicates strong profitability relative to revenues. These ratios provide insights into operational efficiency, profitability, and asset management, essential for investors’ and management’s decision-making processes.

Intangible Assets Recognition

Identifying which items qualify as intangible assets hinges on the criteria of identifiability, control, and future economic benefits. Purchased patents, trademarks, and goodwill acquired through business combinations are capitalized, while internally generated goodwill or items like legal costs for securing patents are expensed unless specific criteria are met. Costs directly associated with securing legal rights, such as legal costs and patent registration fees, are capitalized, whereas research and development expenses are typically expensed unless they pertain to developing in-house intangible assets meeting recognition criteria.

Amortization and Impairment of Intangibles

The amortization of patents, franchises, and licenses depends on their estimated useful lives. For example, a patent with a remaining legal life of 10 years but an economic benefit lasting only 6 years requires adjusting amortization to reflect the shorter useful period. Similarly, franchise amortization follows the contractual or estimated useful life. When future cash flows suggest a possible impairment, a quantitative test compares carrying amounts with recoverable amounts. An impairment loss reduces the asset's book value, impacting net income and total assets. Accurate impairment recognition ensures financial statements present a true and fair view of asset values.

Conclusion

The various scenarios and calculations underscore the importance of applying consistent, accurate, and theoretically sound accounting principles. From asset exchanges, acquisition valuation, depreciation techniques to impairment testing, each decision influences financial reporting and analysis. Simplified methods like straight-line depreciation are preferred for ease, but more sophisticated methods can better match expenses with benefits. Understanding these methods' implications helps users of financial statements interpret a company's true financial position and operational efficiency effectively.

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