Moore Corporation follows a policy of a 10% depreciation charge per year on all
ID: 2369078 • Letter: M
Question
Moore Corporation follows a policy of a 10% depreciation charge per year on all machinery and a 5% depreciation charge per year on buildings. The following transaction occured in 2011:
March 31, 2012- Negotiations which began in 2011 were completed and a warehouse purchased 1/1/03 (depreciation has been properly charged through December 31, 2011) at a cost of $3,200,000 with a fair market value of $2,000,0000 was exchange for a second warehouse which also had a fair market value of $2,000,000. The exchange had no commercial substance. Both parcels of land on which the warehouses were located were equal in value, and had a fair value equal to book value.
June 30, 2012- Machinery with a cost of $240,000 and accumulated depreciation trhough January 1 of $180,000 was exchange with $150,000 cash for a parcel of land with a fair market value of $230,000.
prepare all appropriate journal entries for Moore Corporation for the above dates.
Explanation / Answer
First, we'll need to calculate the accumulated depreciation on the warehouse that we own.
Cost $3,200,000 x 5% per year =$160,000 per year
As of March 31, 2012, the building has been depreciated over 9 years, 3 months (1/1/03 to 3/31/12), so accumulated depreciation will be $160,000 x 9.25 years or $1,480,000.
Now, for the journal entry:
March 31, 2012
DR: New Warehouse 2,000,000
DR: Accumulated Depreciation - Old Warehouse 1,480,000
CR: Old Warehouse 3,200,000
CR: Gain on Exchange 280,000
The gain is a "plug" figure showing the difference between the debit side of the entry and the credit side. A gain was generated since the net book value of the old warehouse (Cost - Accumulated Depreciation) was less than the new warehouse being obtained.
June 30, 2012 journal entry:
DR: Land 230,000
DR: Accumulated Depreciation - Machinery 180,000
CR: Machinery 240,000
CR: Cash 150,000
CR: Gain on Exchange 20,000
Again, the value of property (Net book value of the Machinery + Cash) was less than the value of the Land obtained, so we book a gain for the difference.
Hope that helps. Please rate. Thanks.
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