During the current year, Hitch Developers disposed of plant assets in the following

transactions:

Feb. 10 Office equipment costing $24,000 was given to a scrap dealer at no charge.

At the date of disposal, accumulated depreciation on the office equipment amounted to $21,800.

Apr. 1 Hitchcock sold land and a building to Claypool Associates for $900,000, receiving $100,000 cash and a five -

year, 9 percent note receivable for the remaining balance.

Hitchcocks records showed the following amounts: Land, $50,000; Building, $550,000;

Accumulated Depreciation: Building (at the date of disposal), $250,000.

Aug. 15 Hitchcock traded in an old truck for a new one. The old truck had cost $26,000, and its

accumulated depreciation amounted to $18,000. The list price of the new truck was $39,000, but Hitchcock received a $10,000 trade - in allowance for the old truck and paid

$28,000 in cash. Hitchcock includes trucks in its Vehicles account.

Oct. 1 Hitchcock traded in its old computer system as part of the purchase of a new system. The old system had cost $15,000, and its accumulated depreciation amounted to $11,000. The new computers list price was $8,000. Hitchcock accepted a trade - in allowance of $500 for the old computer system, paying $1,500 down in cash and issuing a one - year,8 percent note payable for the $6,000 balance owed.

Instructions

a.

Prepare journal entries to record each of the disposal transactions. Assume that depreciation

expense on each asset has been recorded up to the date of disposal. Thus, you need not update

the accumulated depreciation figures stated in the problem.

b.

Will the gains and losses recorded in part a above affect the gross profit reported in Hitchcocks income statement? Explain.

c.

Explain how the financial reporting of gains and losses on plant assets differs from the

financial reporting of unrealized gains and losses on marketable securities discussed in Chapter 7.

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Question 2

.....................................................................................................Joe Garage................Gas N Go

Estimated normal rate of return on net assets.........................20%..........................20%

Fair value of net idenfiable assets.......................................$950,000..................$980,000

Actual average net income for past five years.....................$220,000...................$275,000

Instructions

a.

Compute an estimated fair value for any goodwill associated with Kivi purchasing Joes Garage. Base your computation upon an assumption that successful service stations typically sell

at about 9.25 times their annual earnings.

b.

Compute an estimated fair value for any goodwill associated with Kivi purchasing Gas N Go . Base your computation upon an assumption that Kivis management expects excess earnings to continue for four years.

c.

Many of Kivis existing service stations are extremely profitable. If Kivi acquires Joes Garage or Gas N Go, should it also record the goodwill associated with its existing locations? Explain