Terry Assignment Part #6: Covers Chapter 10

Goal:

To practice recording an exchange of property, plant, and equipment (PPE) and to determine how the sale affects return on assets (ROA).

Information:

On December 15th, Terry's management decided to trade in an old piece of equipment for a newer model. After discussions with their auditors, Terrys management has decided that the exchange is an exchange with substance.

The old equipment originally cost $380,000 and had been fully depreciated to its $38,000 salvage value. The new equipment has a suggested retail price of $943,000, but the vendor offered Terry a $41,000 trade-in discount on the old equipment if the balance is paid in cash. Terry's management was excited about the deal, since they estimate the fair value of the old equipment to be $35,700 (i.e., the price they believe they would have received if they had tried to dispose of it on the open market).

Assignment:

1. Calculate ROA (net income / avg. total assets) before you make any adjustments.
2. Make the appropriate journal entries to account for the exchange (including any necessary changes to income tax expense).
3. Make any necessary changes to the financial statements.
   1. The income statement must be updated to record the gain/loss on the sale. You must also update the income statement to reflect any changes to income tax expense.
   2. The balance sheet must be updated to reflect:
      1. Any cash received/paid as part of the transaction.
      2. Disposal of the book value of the old equipment
         1. Remember, you must remove the cost of the old equipment and the accumulated depreciation associated with it.
      3. Capitalization of the cost of the new equipment.
      4. The change in income tax payable.
      5. The change in retained earnings.
   3. The statement of cash flows must be updated to reflect any change in cash that occurred because of this disposal.
      1. Cash flows from operations did not change, but you must update net income and the adjustments for a) gain/loss on sale of equipment (which are investing gains/losses) and b) change in income taxes payable.
      2. Cash flows from investing activities needs to be updated to reflect the cash spent on the new equipment.
      3. Cash flows from financing activities did not change.

Calculate ROA (net income / avg. total assets) after you make any