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Oriole Engineering Corporation purchased conveyor equipment with a list price of $9,300....

Question:

Oriole Engineering Corporation purchased conveyor equipment with a list price of $9,300. Presented below are three independent cases related to the equipment.

(a) Oriole paid cash for the equipment 8 days after the purchase. The vendor's credit terms are 2/10, n/30.

(b) Oriole traded in equipment with a book value of $2,100 (initial cost $8,100), and paid$10,400 in cash one Assume that equipment purchases are initially recorded gross month after the purchase. The old equipment could have been sold for $400 at the date of the trade. (The exchange has commercial substance.)

(c) Oriole gave the vendor an $11,000 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective interest rate in the market was 9%.

Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.

Paying for a Fixed Asset:

There are different ways to pay for a fixed asset. This problem shows the following scenarios: a) Purchase Discount b) A Like Kind Exchange c) Purchase with a Note Payable. All the scenarios have different accounting treatments, implication on cash flow, and taxes.

Answer and Explanation: 1

a) Credit terms 2/10, N/30 means that the vendor is offering a 2% discount if the equipment is paid within 10 days. Since it was paid within 8 days the discount is applicable. We could record the equipment gross value of $9,300 and Financial income for the discount. Also possible to record equipment Net of discount. Below is the entry recorded on its gross value.

Debit Credit
Equipment 9300
Interest Income 186
Cash 9114

b) The economic substance of the transaction is that company gave consideration of $400 for asset being traded in, and $10,400 in Cash. This would value the asset at $10,800. In addition to this you are taking the $2100 of book value off the books, and recording a loss for the difference between $2,100 and the Fair Value of $400. The removal of the book value involves reducing respective equipment amount and accumulated depreciation. The journal entry would be as follows:

Debit Credit
Equipment 10800
Accumulated Depreciation 6000
Equipment 8100
Loss on Equipment 1700
Cash 10400

c) The asset should be recorded at Fair value, which is equivalent to the Present Value of the note offered in consideration. The note does not have interest cost, but there is still interest cost in the prevailing effective interest rate for the transaction of 9%. Therefore you would record the asset and liability as follows.

Debit Credit
Equipment 10100
Discount Note Payable 900
Note Payable 11000

Learn more about this topic:

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What Are Fixed Assets? - Definition & Examples

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Chapter 3 / Lesson 10
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Learn the definition of fixed assets and examine their importance. Explore the various types of fixed assets, identify their characteristics, and see examples.


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