On $6/1/2010$ Vandalay Industries began the process of constructing a new factory by purchasing land

and the building sitting on the land for a total of $$2,000,000.$ The fair value of the land at that time was

$$1,600,000$ and the fair value of the building was $$500,000.$ Vandalay paid Wreck It Ralph $$50,000$ to

tear down the building. Vandalay Industries took out a construction loan to finance the construction of

the new building on $9/1/2010$ in the amount of $$5,000,000.$ The interest rate on this loan was $12\%.$

They also had other debt outstanding as follows:

Long term bank loan $$4,000,000$ @ $11\%$

Corporate bond issuance $$6,000,000$ @ $6\%$

On the same day, $9/1/2010,$ construction began. The building was ultimately finished and ready for use

on $3/31/2012.$ The timing of construction expenses is as follows:

Date Expense

$9/1/2010$ $$1,350,000$

$11/1/2010$ $$1,600,000$

$12/31/2010$ $$1,500,000$

$4/1/2011$ $$3,000,000$

$10/1/2011$ $$856,000$

$2/1/2012$ $$2,022,000$

Total $$10,328,000$

Vandalay has a policy of capitalizing interest on self$-$constructed assets when allowable under GAAP but

does not capitalize any interest on costs associated with the purchase of land. Vandalay uses straight

line depreciation for all of its buildings and estimates this building has a salvage value of $$34,000$ and a

useful life of $24$ years. For buildings Vandalay calculated depreciation for partial periods on the basis of

the nearest full month.

On the same day the building was completed, $3/31/2012,$ Vandalay paid $$500,000$ to purchase a

machine to be used in the new factory that came with a $2$ year warranty that covered any necessary

repairs due to malfunctioning parts. The fair value of the machine and warranty separately were

$$450,000$ and $$112,500.$ Vandalay also had to pay $$20,000$ to transport the machine to its new facility

and $$30,000$ to have the machine installed. Vandalay uses the double declining balance method to

depreciate this machine as well as the half year method and expects the machine to have a useful life of

$10$ years and a salvage value of $$50,000.$

In the beginning of the third calendar year of the machine$$s useful life, January $2014,$ there was a

sudden downturn in the market which prompted Vandalay$$s Controller to undertake an impairment test

related to the machine. At that time it was determined that the future undiscounted cash flows

associated with the machine totaled $$330,000$ and the present value of those cash flows totaled

$$240,000.$

In January $2015$ Vandalay changed how it was using the machine to generate future cash flows. This

change led to an estimate of future undiscounted cash flows resulting from the use of the machine

totaling $$220,000.$ There was no market for this machine, but the present value of these projected

future cash flows was $$182,000.$ The change in the use of the machine did not affect Vandalay$$s

estimate of either salvage value or useful life of the machine.

In March $2015,$ Vandalay determined that the machine would ultimately only have a salvage value of

$$14,000$ as opposed to the originally estimated $$50,000.$ At that time they also changed depreciation

methods on the machine to the straight line method and determined that remaining useful life of the

machine was $5$ years instead of $7$ years.

On $9/1/2017$ Vandalay entered into a non$-$monetary exchange agreement with Putty Pros LLP$.$ Vandalay

gave Putty the machine which at that time had a fair value of $$100,000$ along with $$15,000$ cash in

exchange for a newer machine that would be able to handle additional demand that Vandalay had been

experiencing currently and would result in an increase to both production and revenue. The new

machine was carried on Putty$$s books at an initial cost of $$150,000$ and accumulated depreciation of

$$50,000.$

Required

$1)$ Determine the initial value that will be recorded on the balance sheet of Vandalay Industries for

a$)$ the land, b$)$ the building and c$)$ the original machine.

$2)$ Calculate the amount of depreciation expense to be recorded by Vandalay for both the building

and the original machine for the years $20122016.$

$3)$ Record any journal entries necessary to recognize an impairment loss on either the building or

the original machine using the information that is provided in the case.

$4)$ Record the journal entry on both Vandalay$$s and Putty$$s books to reflect the exchange of goods

that takes place on $9/1/2017.($Don$$t forget to take depreciation into account up to the point in

time when the exchange takes place. Assume the $$50,000$ of accumulated depreciation on

Putty$$s books includes depreciation expense for the first $8$ months of $2017).$

$5)$ Record the same journal entries in $4)$ but under the assumption that the exchange lacks

commercial substance.