Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
Book Icon
Chapter 8, Problem 1AP

1.

To determine

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

1.

Expert Solution
Check Mark

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.

2.

Expert Solution
Check Mark

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.

DateAccount titles and explanation

Post

Ref.

Debit

($)

Credit

($)

June 1, 2013Equipment61,500
Cash1,500
Common stock4,000
Additional paid-in capital8,000
Note payable48,000
(To record the purchase of equipment)

Table (1)

Working Notes:

Computations required for recording the purchase of the machine:

Compute common stock value.

Common stock value= Number of shares × Par value per share= 2,000 shares × $2= $4,000

Compute the additional paid-in capital.

Additional paid-in capital=(Number of shares×(Market value per sharePar value per share))=(2,000shares×($6$2))=2,000shares×$4=$8,000

Compute the note payable.

Note payable=(Invoice price of the machine(Common stock and additional paid-in capital))=($60,000($4,000+$8,000))=$60,000$12,000=$48,000

Compute the cost of the equipment:

Cost of the equipment (Machine)=(Invoice price of machine+Installation costs)=$60,000+$1,500=$61,500

  • 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.

Journalize the transaction for the subsequent payment made.

DateAccount titles and explanation

Post

Ref.

Debit

($)

Credit

($)

September 2, 2013Note payable48,000
Interest expense1,440
Cash49,440
(To record the subsequent payment made)

Table (2)

Working Notes:

Computation required for recording the payment made on the machine:

Calculate the amount of interest expense.

Interest expense =Note payable×Interest rate×Number of months interest is due(June 1 to September 1)Total number of months = $48,000×12100×3months12months=$1,440

  • Note Payable is a liability account and it is decreased. Hence, debit the note payable account.
  • Interest expense is an expense account and it is increased, which in turn has decreased the stockholder’s equity account. Hence, debit the interest expense 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.

3.

Expert Solution
Check Mark

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:

Assets = Liabilities + Stockholder's Equity

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

Financial Accounting, 8th Edition, Chapter 8, Problem 1AP

Figure (1)

  • On 1st June, Corporation Wpurchased a machine for $61,500 and signed a note payable for $48,000. The payment was made by issuing common stock of $4,000, and additional paid-in capital was $8,000. Hence, this increases the assets (equipment) by $61,500, and liabilities (note payable) by $48,000 and increases the stockholder’s equity (common stock) by $4,000 and (additional paid-in capital) by $8,000. Cash payment on installation costs of the machine decreases the assets (cash) by $1,500.
  • On 2nd September, Corporation W paid the balance due on the machine. This decreases the assets (cash) balance by $49,440 and liabilities (accounts payable) by $48,000 and stockholder’s equity (interest expense) by $1,440.

4.

To determine

Explain the basis which was used for any questionable items.

4.

Expert Solution
Check Mark

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.
  • Interest expense of $1,440 is the cost of financing. Hence, it should not be included in the cost of the machinery but it should be recorded as an interest expense.
  • For the valuation of the common stock, the market price per share of $6 is used. That is, this amount of $6 is allocated between the common stock at the par value of $2 and additional paid-in capital account at the balance amount of $4.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 8 Solutions

Financial Accounting, 8th Edition

Ch. 8 - Prob. 11QCh. 8 - Prob. 12QCh. 8 - Prob. 13QCh. 8 - Prob. 14QCh. 8 - Prob. 15QCh. 8 - Why is depreciation expense added to net income...Ch. 8 - Prob. 1MCQCh. 8 - Prob. 2MCQCh. 8 - Prob. 3MCQCh. 8 - Prob. 4MCQCh. 8 - Prob. 5MCQCh. 8 - Prob. 6MCQCh. 8 - Prob. 7MCQCh. 8 - Prob. 8MCQCh. 8 - Prob. 9MCQCh. 8 - (Chapter Supplement) Irish Industries purchased a...Ch. 8 - Prob. 1MECh. 8 - Prob. 2MECh. 8 - Prob. 3MECh. 8 - Prob. 4MECh. 8 - Computing Book Value (Double-Declining-Balance...Ch. 8 - Computing Book Value (Units-of-Production...Ch. 8 - Identifying Asset Impairment LO8-4 For each of the...Ch. 8 - Prob. 8MECh. 8 - Prob. 9MECh. 8 - Prob. 10MECh. 8 - Prob. 1ECh. 8 - Prob. 2ECh. 8 - Computing and Recording Cost and Depreciation of...Ch. 8 - Prob. 4ECh. 8 - Prob. 5ECh. 8 - Prob. 6ECh. 8 - Prob. 7ECh. 8 - Computing Depreciation under Alternative Methods...Ch. 8 - Prob. 9ECh. 8 - Prob. 10ECh. 8 - Computing Depreciation and Book Value for Two...Ch. 8 - Prob. 12ECh. 8 - Prob. 13ECh. 8 - Prob. 14ECh. 8 - Prob. 15ECh. 8 - Prob. 16ECh. 8 - Prob. 17ECh. 8 - Prob. 18ECh. 8 - Prob. 19ECh. 8 - Prob. 20ECh. 8 - Prob. 21ECh. 8 - Prob. 22ECh. 8 - Prob. 23ECh. 8 - Prob. 1PCh. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - Evaluating the Effect of Alternative Depreciation...Ch. 8 - Prob. 6PCh. 8 - Prob. 7PCh. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - Prob. 1APCh. 8 - Prob. 2APCh. 8 - Computing the Acquisition Cost and Recording...Ch. 8 - Prob. 4APCh. 8 - Prob. 5APCh. 8 - Prob. 6APCh. 8 - Prob. 7APCh. 8 - Prob. 1ACOMPCh. 8 - Prob. 1BCOMPCh. 8 - Prob. 1CCOMPCh. 8 - Prob. 1DCOMPCh. 8 - Prob. 1ECOMPCh. 8 - Prob. 1CPCh. 8 - Prob. 2CPCh. 8 - Prob. 3CPCh. 8 - Prob. 4CPCh. 8 - Prob. 5CPCh. 8 - Prob. 6CPCh. 8 - Prob. 7CPCh. 8 - Prob. 9CPCh. 8 - Prob. 1CC
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education