Question

Notes for Journal Entries:

1. uses periodic inventory system and LIFO
2. All credit sales discounts are recorded using the net method – customers receive a 3 percent discount if they pay within 30 days.
3. Purchase discounts are recorded using the net method
4. All depreciation is straight line.

Purchased land and a building. A $200,000 cash down payment was required and a $800,000 note was accepted by the seller for the balance (12 percent interest payable each year on June 30). The fair value of the land at the date of purchase was deemed to be 300,000 and the fair value of the building was 900,000. The building has an estimated residual value of $0 and a useful life of 30 years.

What are the journal entries and adjusting entries for the previous entry?

Answer 1

1)

Account Titles	Debit	Credit
Accounts Receivable	-
Sales Revenue		-

2)

Account Titles	Debit	Credit
Purchases	-
Accounts Payable		-

We cannot report the assets at market value since the market value is more than we paid for the assets. Hence Calculate each asset’s percent of market value (Asset market value / total market value of all assets)

= (300000 land FV+ 900000 building FV)

= 300000/1200000 = 0.25

= 900000/1200000 = 0.75

= 0.25*1000000 (actual purchase consideration of cash and notes payable)

= 250,000 for land

= 750,000 for building

3)

Account Titles	Debit	Credit
Land	$250,000
Building	$750,000
Cash		$200,000
Notes Payable		$800,000

4)

Account Titles	Debit	Credit
Depreciation ($750,000 / 30)	$25,000
Accumulated Depreciation		$25,000

5)

Account Titles	Debit	Credit
Interest Expense ($800000*12%)	$96,000
Interest Payable		$96,000