January 1, Year 1, Cougar Corporation exchanged machinery for a six-acre tract of land with Ellis Corporation.
Question:
January 1, Year 1, Cougar Corporation exchanged machinery for a six-acre tract of land with Ellis Corporation. The machinery has a net book value of $2 million and a fair value of $2.2 million. Cougar also wrote a $500,000 non-interest-bearing one year note payable on December 31, Year 1, to Ellis Corporation to make the transaction go through. Assume the exchange has commercial substance. Also, assume similar loans bear a 12% interest. (For one year, FV of $1 at 12% = 1.12; PV of $1 at 12% = 0.89286)
Cougar Co. built a warehouse on this tract of land during Years 2 and 3. The following payments were made during construction for building materials, labor, and overhead:
January 1, Year 2 | April 1, Year 2 | October 1, Year 2 | February 1, Year 3 |
$130,000 | $240,000 | $200,000 | $350,000 |
In addition, Cougar:
Borrowed $300,000 at 12% on January 1, Year 2, under a construction note, to finance this warehouse | |
Had bonds outstanding of $1,000,000 at 10%, on January 1, Year 2; interest is payable annually on December 31 | |
Had notes payable outstanding of $3,000,000 at 7% on January 1, Year 2; interest is payable annually on December 31 | |
Completed construction on the building, which was ready for immediate use on March 1, Year 3 |
Required:
- Please record all Journal entries related to the exchange in Year 1. Assume Cougar paid the notes on time.
- Please calculate the warehouse cost, including the capitalized interest based on specific interest method.
- Assume Cougar depreciate the warehouse using 150% declining balance method and the estimated useful life for this warehouse is 20 year. Please record the depreciation for this warehouse for Year 3.