Chapter 10, Problem 10.21E

To determine

Property, Plant, and Equipment:

Property, Plant, and Equipment refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

To Prepare: The journal entry required to record the acquisition of the equipment.

Explanation of Solution

1.

Prepare the journal entry to record the purchase of equipment on account:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Equipment		24,500
	Accounts payable			24,500
	(To record the exchange on the books of R Company.)

Table (1)

Working Note:

$\begin{array}{c}\text{Net Equipment=Cost of equipment}-\text{Discount at 2\%}\\ \text{=\$25,000}-\left(\$25,000\times \frac{2}{100}\right)\\ =\$25,000-\$500\\ =\$24,500\end{array}$

• Equipment is an asset account, and it is increased. Hence, debit the equipment account with $24,500.
• Accounts payable is a liability account, and it is increased. Hence, credit the accounts payable account with $24,500.

2.

Prepare the journal entry to record the purchase of equipment in exchange with a note:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Equipment		24,545
	Discount on note payable $\left(\$27,000-\$24,545\right)$		2,455
	Note payable			27,000
	(To record the exchange on the books of R Company.)

Table (2)

Working Note:

Calculate the cost of equipment.

$\begin{array}{c}\text{Present value of equipment}=\text{Note payable amount}\times \text{Present value of \$1 }\\ =\$27,000\times \text{.90909}\\ =\$24,545\\ \end{array}$

Note: PV factor (Present value of $1: n = 1, i = 10%) is taken from the table value (Table 2 in Appendix from textbook).

• Equipment is an asset account, and it is increased. Hence, debit the equipment account with $24,545.
• Discount on note payable is a contra liability account, and it is increased. Hence, debit the discount on note payable account with $2,455.
• Note payable is a liability account, and it is increased. Hence, credit the accounts payable account with $27,000.

3.

Prepare journal entry to record the exchange of old equipment for new equipment.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	New Equipment		24,500
	Accumulated depreciation – Old asset		8,000
	Loss		3,500
	Cash			22,000
	Old Equipment			14,000
	(To record the exchange of old equipment for new equipment.)

Table (3)

• New equipment increases the asset account. Hence, debit New Equipment account with $24,500.
• Accumulated depreciation – old asset is a contra asset. It increases the value of asset account. Therefore, debit Accumulated Depreciation with $8,000.
• Loss on sale of exchange of assets decreases the equity by $3,500. Hence, debit Loss on sale of exchange of assets with $3,500.
• Cash is an asset account and decreased. Therefore, credit Cash account with $22,000.
• Old Equipment is an asset account and decreased. Therefore, credit Old Equipment account with $14,000.

Working note:

Determine the value of new equipment.

$\begin{array}{c}\text{Value of equipment = Fair value of old equipment+Cash}\text{paid}\\ =\$2,500+\$22,000\\ =\$24,500\end{array}$

Determine the loss on exchange of assets.

$\begin{array}{c}\text{Loss on exchange of asset = }\left(\begin{array}{l}\text{Book value of old equipment }\\ \text{–Fair value of old equipment}\end{array}\right)\\ =\$6,000-\$2,500\\ =\$3,500\end{array}$

4.

Prepare the journal entry to record the purchase of equipment by issuing common stock:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Equipment		24,000
	Common stock			24,000
	(To record the exchange on the books of R Company)

Table (4)

• Equipment is an asset account, and it is increased. Hence, debit the equipment account with $24,000.
• Common stock is a component of equity account, and it is increased. Hence, credit the common stock account with $24,000