Question

In January 2019, Cordova Company entered into a contract to acquire a new machine for its factory. The machine, which has a cash price of $210,000, was paid for as follows: $50,000 Down payment Note payable in 4 equal annual payments starting in January 2020 600 shares of Cordova preferred stock with a mutually agreed value of $100 per share (par value $100) $120,000 $60,000 Fair rate of interest on the non-interest-bearing note 10% Required: 1. Determine the cost of the machine. What principle guides the determination of the cost of the machine? 2. Prepare the journal entry to record the acquisition of the machine. 3. Next Level How would your answer change, if at all, if the $210,000 cash price were not available?

Answer 1

1
The cost of machine will be it's cash price which is equal to $2,10,000.
Principle guiding determination of cost of machine:
(c )	If the Fair value of asset received is more clearly evident than the fair value of the asset surrendered, it can be used to measure the cost of the asset acquired.
2. Journal Entry
Date	Accounts	Dr.	Cr.
Jan 1, 2019	Machine Dr	$2,10,000
	Interest Expense Dr	$20,000		Balance amount
	To Cash		$50,000
	To Notes Payable		$1,20,000
	To Preferred Stock		$60,000
(Being purchase of Machine by paying downpayment, issuing Note Payable and preferred shares.)
3	If the $2,10,000 cash price were not available:
(a)	The cost of the machine is the discounted note payable plus the preferred stock issued plus the cash paid.