Question

Headland Industries purchased the following assets and constructed a building as well. All this was done during the current year. Assets 1 and 2: These assets were purchased as a lump sum for $130,000 cash. The following information was gathered. Initial Cost on Description Seller's Books Machinery $130,000 Equipment 78,000 Depreciation to Date on Seller's Books $65,000 13,000 Book Value on Seller's Books Appraised Value $65,000 $117.000 65,000 39,000 Asset 3: This machine was acquired by making a $13.000 down payment and issuing a $39.000,2-year, zero-interest-bearing note. The note is to be paid off in two $19.500 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $46,670. Asset 4: This machinery was acquired by trading in used machinery, (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows Cost of machinery traded Accumulated depreciation to date of sale Fair value of machinery traded Cash received Fair value of machinery acquired $130.000 52,000 104,000 13.000 91.000 Asset 5: Equipment was acquired by issuing 100 shares of $10 par value common stock. The stock had a market price of $14 per share. Construction of Building: A building was constructed on land purchased last year at a cost of $195,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows. Date 2/1 Payment 156000

Answer 1

In the books oh Headland Industries
General Journal
Date	Description	Debit	Credit
	Machinery	$            65,000
	Equipment	$            65,000
	Cash		$         1,30,000
	(being assets 1 & 2 acquired for cash)
	Machinery	$            52,000
	Cash		$            13,000
	Note Payable		$            39,000
	(being asset 3 acquired)
	Machinery	$            68,250
	Cash	$            13,000
	Old machinery (book value)		$            78,000
	Gain on exchange		$              3,250
	(being asset 4 acquired)
	Equipment (100 shares @ $ 14)	$              1,400
	Common Stock (100 shares of $10)		$              1,000
	Additional paid in capital		$                  400
	(being asset 5 purchased)
	Building	$       13,78,000
	Cash		$       13,78,000
	(being building constructed)
Working for Asset 4
Calculation of gain
Gain = fair value of old asset- cost value of old asset
= 104000-78000
=26000
Percentage of gain = Cash received/ fair value of old asset
	=13000/104000
	=12.5%
Since gain is less than 25% and exchange lacks commercial substance then gain is recognised on proportional basis
Proportionate gain = Total gain * percentage of gain
	=26000*12.5%
	=3250
Cost of new machinery acquired = book value of old asset+ gain- cash received
	68250