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

A.

Journal entry 40,000/(1-.02) = 39,200

Debit: Equipment - new 39,200

Credit: Accounts Payable 39,200

B. 42,000/(1+.12)=37,500 then 42,000-37,500 = 4,500

Debit: Equipment - new 37,500

Debit: Discount on Notes Payable 4,500

Credit: Notes Payable 42,000

C.

Debit: Equipment - new 45,500 (37,000+8,500)

Debit: Accumulated Depreciation 15,500

Debit: Loss on Exchange of assets 5,000 (13,500-8,500)

Credit: Cash 37,000

Credit: Equipment - old 29,000

D.

Debit: Equipment 40,000

Credit: Common Stock 40,000

Answer 2

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.

Step-by-step explanation: