Chapter 8, Problem 1P

1.

To determine

Describe the classifications of long-lived assets and to explain their differences.

Explanation of Solution

Long-lived assets:

Long-lived assetsrefer 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.

Classifications of Long-lived Assets:

The two major classifications of long-lived assets are as follows:

• Tangible assets
• Intangible assets

Difference between tangible assets and intangible assets:

Tangible Assets:

Tangible assets are the long-term assets used by the company, which have physical existence, and can be seen, touched and felt. Some of the examples of the tangible assets include plant, property, land, and building.

Intangible Assets:

Intangible assets are the long-term assets having no physical existence. However, the benefits provided by these assets are used by the company for a long period of time. These intangible assets represent rights. Some of the examples of the intangible assets include patent, trademark, goodwill, and copyrights.

2.

To determine

Record the purchase and the subsequent payment made and to show their computations.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Journalize the transaction for the purchase of the equipment.

Date	Account titles and explanation	Post Ref.	Debit ($)	Credit ($)
January 2	Equipment		86,860
	Cash			2,400
	Common stock			2,000
	Additional paid-in capital			5,000
	Note payable			60,000
	Accounts payable			17,460
	(To record the purchase of equipment)

Table (1)

Working Notes:

Computations required for recording the purchase of the machine:

Compute common stock value.

$\begin{array}{c}\text{Common stock value= Number of shares }\times \text{ Par value per share}\\ \text{= 2,000 shares × \$1}\\ \text{= \$2,000}\end{array}$

Compute the additional paid-in capital.

$\begin{array}{c}\text{Additional paid-in capital=}\left(\text{Number of shares}\times \left(\begin{array}{l}\text{Market value per share}\\ -\text{Par value per share}\end{array}\right)\right)\\ =\left(2,000\text{shares}\times \left(\$3.50-\$1\right)\right)\\ =2,000\text{shares}\times \$2.50\\ =\$5,000\end{array}$

Compute the accounts payable.

$\begin{array}{c}\text{Balance amount=}\left(\begin{array}{l}\text{Invoice price of the machine}-\text{Note payable}\\ -\text{Stock issued}\end{array}\right)\\ =\left(\$85,000-\$60,000-\$7,000\right)\\ =\$18,000\end{array}$

$\begin{array}{c}\text{Accounts payable}=\left(\text{Balance amount}-\left(\text{Discount}\right)\right)\\ =\left(\text{\$18,000}-\left(\text{\$18,000}\times \text{.03}\right)\right)\\ =\$18,000-\$540\\ =\$17,460\end{array}$

Compute the cost of the equipment:

$\begin{array}{c}\text{Cost of the equipment (Machine)=}\left(\begin{array}{l}\left(\text{Invoice price of machine}-\text{Discount}\right)\\ \text{+Installation costs}\end{array}\right)\\ =\left(\left(\$85,000-\$540\right)+\$2,400\right)\\ =\$86,860\end{array}$

• Equipment is an asset account and the amount has increased because equipment (plant asset) is purchased; therefore, debit Equipment account.
• Cash is an asset account. The amount has decreased because cash is paid for purchase of equipment. Therefore, credit cash account.
• Common Stock is a stockholders’ equity account and the amount has increased due to the distribution of stock dividends. Therefore, credit common stock account.
• Additional paid-in capital is a component of stockholder’s equity and it has increased the value of stockholder’s equity. Hence, credit the additional paid-in capital.
• Note Payable is a liability account. Note is signed for the purchase of the machine. Therefore, credit note payable account.
• Accounts Payable is a liability account. The balance amount of the note has to be paid on the purchase of the machine. This increases the liability account. Therefore, credit accounts payable account.

Journalize the transaction for the subsequent payment made.

Date	Account titles and explanation	Post Ref.	Debit ($)	Credit ($)
January 15	Accounts payable		17,460
	Financing expenses		540
	Cash			18,000
	(To record the subsequent payment made)

Table (2)

• Accounts Payable is a liability account and it is decreased. Hence, debit the accounts payable account.
• Financing expenses are the expenses account, and they are increased, which in turn decreased the stockholder’s equity account. Hence, debit the financing expenses account.
• Cash is an asset account, and it is decreased. Therefore, credit cash account.

3.

To determine

Indicate the accounts, amounts, and effects of the purchase and subsequent cash payment on the accounting equation.

Explanation of Solution

Accounting Equation:

Accounting equation is the mathematical representation of the relationship among the assets, liabilities, and stockholder’s equity at any given point of time. The components of the accounting equation include the assets, liabilities and stockholder’s Equity. In the accounting equation, the assets, which are placed on the left side of the equation, and the liabilities, and stockholder’s equity which are placed on the right side, must always balance. The accounting equation is as follows:

$\text{Assets = Liabilities + Stockholder's Equity}$

Indicate the accounts, amounts, and effects of purchase and subsequent cashpaymenton the accounting equation:

Date	Assets		=	Liabilities		-	Stockholders’ Equity
January 2	Equipment	86,860		Note payable Accounts payable	60,000 17,460		Common stock Additional paid-in capital	2,000 5,000
	Cash	–2,400
January 12	Cash	−18,000		Accounts payable	−17,460		Financing expense	–540

Table (1)

• On 2nd January, Company S purchased a machine for $86,860 and signed a short-term note for $60,000. The payment was made by issuing common stock of $2,000, and additional paid-in capital was $5,000 and the remaining balance payable on machine is $17,460. Hence, this increases the assets (equipment) by $86,860, and liabilities (note payable) by $60,000 and (accounts payable) by $17,460, and increases the stockholder’s equity (common stock) by $2,000 and (additional paid-in capital) by $5,000. Cash payment on installation costs of the machine decreases the assets (cash) by $2,400.
• On 12th January, Company S paid the balance due on the machine. This decreases the assets (cash) balance by $18,000, liabilities (accounts payable) by $17,460, and the stockholder’s account (Financing expense) by $540.

4.

To determine

Explain the basis which was used for any questionable items.

Explanation of Solution

The basis which was used for the questionable items are as follows:

• Only installation costs are included in the cost of the machinery. The freight charges are not included in the cost of the machinery as it was paid by the vendor.
• For the valuation of the common stock, the market price per share of $3.50 is used. That is, this amount of $3.50 is allocated between the common stock at the par value of $1 and additional paid-in capital account at the balance amount of $2.50.