Springfield Corporation Purchases A New Machine On March 3

Springfield Corporation Purchases A New Machine On March 3 20x4

Springfield Corporation Purchases A New Machine On March 3 20x4

Identify and analyze the accounting treatments for the acquisition and depreciation of a new machine purchased by Springfield Corporation, including the recording of the purchase, depreciation using different methods (straight-line, double-declining balance, units-of-production), and the associated journal entries over the machine's useful life. Additionally, examine the proper accounting for a patent purchased by Fred Corporation, spanning initial recognition, interest, and amortization, with journal entries for each stage over multiple years. Finally, analyze the legal implications of federal legislation affecting the ownership and use of a proprietary product (Greatstuff), focusing on the argument against the application of the Commerce Clause to this situation from the perspective of a Dallas-based organic food store’s legal representative.

Paper For Above instruction

Introduction

The accurate accounting for long-lived assets and intangible assets is fundamental to financial reporting, providing stakeholders with a transparent view of a company's resource base and earning potential. This paper offers a comprehensive analysis of the accounting treatments involved in the purchase and depreciation of a machine by Springfield Corporation, the recognition and amortization of a patent acquired by Fred Corporation, and a legal argument pertaining to federal legislation over a proprietary product called Greatstuff. Each section integrates relevant accounting principles, standards, and legal interpretations to elucidate the complexities inherent in these scenarios.

Part 1: Purchase and Depreciation of the Machine by Springfield Corporation

1A. Recording the purchase of the machine

Springfield Corporation's purchase of a new machine on March 3, 20X4, for $35,600, along with additional costs of $3,400 for transportation and setup, totals $39,000. According to accounting standards (FASB ASC 360), the capitalized cost of equipment includes all expenditures necessary to acquire the asset and prepare it for use (Financial Accounting Standards Board, 2020). Therefore, the journal entry to record this purchase on March 3, 20X4, is:

Debit: Machinery & Equipment  $39,000

Credit: Cash                     $39,000

This entry reflects the acquisition cost, recognizing the asset at its total capitalized value.

1B. Depreciation using the straight-line method

With an estimated useful life of five years, no residual value, and employing the half-year convention (assuming depreciation begins mid-year), annual depreciation expense under the straight-line method is calculated as:

  • Cost of asset: $39,000
  • Estimated useful life: 5 years
  • Residual value: $0
  • Annual depreciation: $39,000 / 5 = $7,800
  • Depreciation expense for Year 1 (half-year convention): $7,800 × 0.5 = $3,900
  • Depreciation expense for Year 2: $7,800

Accounting for these, the journal entries over the first two years are:

Year 1:

Debit: Depreciation Expense  $3,900


Credit: Accumulated Depreciation - Machinery  $3,900


Year 2:


Debit: Depreciation Expense  $7,800


Credit: Accumulated Depreciation - Machinery  $7,800

1C. Depreciation using the double-declining balance method

Double-declining balance (DDB) applies a rate twice the straight-line rate (40%) to the declining book value. Since the half-year convention applies, depreciation is recorded for six months in the first year and the second year accordingly.

  • Year 1:

    Depreciation = 2 × (1/5) × $39,000 × 0.5 = 0.4 × $39,000 × 0.5 = $7,800

  • Year 2:

    Remaining book value after Year 1 depreciation: $39,000 - $7,800 = $31,200

    Depreciation for Year 2: 2 × (1/5) × $31,200 × 0.5 = $6,240

Journal entries:

Year 1:

Debit: Depreciation Expense  $7,800


Credit: Accumulated Depreciation - Machinery  $7,800


Year 2:


Debit: Depreciation Expense  $6,240


Credit: Accumulated Depreciation - Machinery  $6,240

1D. Units-of-Production Depreciation

The total estimated units during the machine's life are 2,400,000 units. The depreciation per unit is:

  • Depreciation per unit: $39,000 / 2,400,000 units = $0.01625

Year 1 production: 600,000 units → Depreciation: 600,000 × $0.01625 = $10,350

Year 2 production: 578,000 units → Depreciation: 578,000 × $0.01625 = $9,392.50

Journal entries:

Year 1:

Debit: Depreciation Expense  $10,350


Credit: Accumulated Depreciation - Machinery  $10,350


Year 2:


Debit: Depreciation Expense  $9,392.50


Credit: Accumulated Depreciation - Machinery  $9,392.50

Part 2: Accounting for Fred Corporation's Patent

2A. Recognition of the patent

Fred Corporation purchases a patent for $10,000,000 on January 1, Year X6, payable at the end of three years. Since the purchase price exceeds the fair value and interest is implicit at 6%, the initial recording requires calculating the present value (PV) of the payable amount. Using the formula:

PV = Future Value / (1 + r)^n

PV = $10,000,000 / (1 + 0.06)^3 ≈ $8,895,857

The journal entry on 1/1/X6 to recognize the patent and corresponding liability is:

Debit: Patent  $8,895,857

Credit: Notes Payable  $8,895,857

This accounts for the present value of the liability and the intangible asset's recognized value.

2B. Recording interest expense and amortization over years X6 – X8

Interest expense is accrued annually based on the effective interest method. The initial liability of $8,895,857 accrues interest at 6%, compounded annually:

  • End of Year X6:

    Interest expense = $8,895,857 × 6% = $533,751.42

    The liability increases by this amount.

  • End of Year X7:

    New liability = $8,895,857 + $533,751.42 = $9,429,608.42

    Interest expense = $9,429,608.42 × 6% = $565,776.50

  • End of Year X8:

    New liability = $9,429,608.42 + $565,776.50 = $9,995,384.92

    Interest expense = $9,995,384.92 × 6% ≈ $599,723.09

The journal entries are:

12/31/X6:

Debit: Interest Expense  $533,751.42


Credit: Interest Payable  $533,751.42


12/31/X6:


Debit: Interest Payable  $533,751.42


Credit: Cash  $533,751.42


Debit: Patent Amortization Expense  $895,857 / 10 = $895,857 (assuming straight-line)


Credit: Accumulated Amortization – Patents  $895,857


(Repeat similar entries for X7 and X8)

2C. Payment of the note payable on 12/31/X8

At the end of Year X8, Fred pays off the note payable of approximately $10 million, including accrued interest. The journal entry to settle the debt would be:

Debit: Notes Payable  $8,895,857

Debit: Interest Payable  (interest accrued)


Debit: Cash  (total amount paid)


Credit: Cash (total amount paid)

This concludes the financial obligation for the patent purchase.

Part 3: Legal Implications — The Greatstuff Case

Background

The case involves a proprietary product, Greatstuff, developed by a Dallas-based store, which experienced explosive growth, logistical expansion, and legal challenges that involve the application of the Commerce Clause. Recent legislation imposes federal taxes and mandates formula disclosure, prompting legal scrutiny over its constitutionality.

Legal Argument Against the Application of the Commerce Clause

Under U.S. constitutional law, the Commerce Clause grants Congress the authority to regulate interstate commerce. However, not all activities involving goods are inherently subject to federal regulation, especially if such activities are purely local or do not have a substantial effect on interstate commerce (United States v. Lopez, 1995). In the case of Greatstuff, the Dallas store’s ownership and production of the organic food may be argued as intrastate activities primarily confined within Texas borders. The store argues that the manufacture, sale, and local distribution of Greatstuff lack a substantial nexus to interstate commerce, and thus, federal legislation imposes unconstitutional restrictions on state and local commerce.

The decline in federal jurisdiction over purely intrastate activities is reinforced by Supreme Court decisions emphasizing the importance of a “substantial economic effect” that originates in interstate commerce (Gibbons v. Ogden, 1824). The Dallas store contends that the production and sale are local acts involving no direct influence on interstate markets or commerce, and that the legislation exceeds Congress’s constitutional authority under the Commerce Clause. Therefore, the store’s legal team argues that the legislation’s provisions, such as federal sales tax and mandatory disclosure, violate the Tenth Amendment’s reservation of powers to the states.

Legal Significance

This legal contention underscores the importance of distinguishing between activities that are genuinely interstate in nature and those that are local in character. The outcome relies heavily on the legal interpretation of the scope of federal authority and the definition of interstate commerce, particularly in cases involving proprietary products produced and sold solely within a state but potentially affecting interstate markets indirectly.

Conclusion

The proper accounting for Springfield's equipment and Fred’s patent involves precise application of depreciation and amortization principles, respectively, ensuring adherence to relevant standards such as those issued by FASB. Meanwhile, the legal discussion recognizes the constitutional limits of Congress’s regulatory powers under the Commerce Clause, asserting that the production and sale of Greatstuff should not be subject to federal legislation if it is solely intrastate activity. Both accounting practices and legal interpretations emphasize clarifying activity scope and asset valuation for accurate reporting and constitutional compliance, respectively.

References

  • Financial Accounting Standards Board (2020). FASB Accounting Standards Codification (ASC) 360: Property, Plant, and Equipment. FASB.
  • Financial Accounting Standards Board (2020). FASB ASC 350: Intangibles - Goodwill and Other. FASB.
  • Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824).
  • United States v. Lopez, 514 U.S. 549 (1995).
  • FASB (2020). Revenue Recognition and Depreciation Standards. FASB.
  • Gautam, V., & Ghosh, S. (2019). Accounting for intangible assets: A review. Journal of Business and Financial Accounting, 46(3), 423-448.
  • U.S. Constitution, Article I, Section 8, Clauses 3 and 18.
  • Harvard Law Review (2014). Limits on the Commerce Power: Recent Cases and Future Perspectives. Harvard Law Review, 127(6), 1502-1520.
  • In re Patent Litigation, 350 U.S. 273 (1956).
  • Litvinov, M. (2021). Constitutional limits on federal regulation of local industries. American Journal of International Law, 115(2), 356-392.

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