Question

Tristar Production Company began operations on September 1, 2018. Listed below are a number of transactions that occurred during its first four months of operations. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. On September 1, the company acquired five acres of land with a building that will be used as a warehouse. Tristar paid $290,000 in cash for the property. According to appraisals, the land had a fair value of $204,600 and the building had a fair value of $105,400.
2. On September 1, Tristar signed a $59,000 noninterest-bearing note to purchase equipment. The $59,000 payment is due on September 1, 2019. Assume that 8% is a reasonable interest rate.
3. On September 15, a truck was donated to the corporation. Similar trucks were selling for $4,400.
4. On September 18, the company paid its lawyer $7,000 for organizing the corporation.
5. On October 10, Tristar purchased maintenance equipment for cash. The purchase price was $34,000 and $1,450 in freight charges also were paid.
6. On December 2, Tristar acquired various items of office equipment. The company was short of cash and could not pay the $7,400 normal cash price. The supplier agreed to accept 200 shares of the company's nopar common stock in exchange for the equipment. The fair value of the stock is not readily determinable.
7. On December 10, the company acquired a tract of land at a cost of $39,000. It paid $7,000 down and signed a 10% note with both principal and interest due in one year. Ten percent is an appropriate rate of interest for this note.

Required:
Prepare journal entries to record each of the above transactions.

Answer 1

1.acquired five acres of land: Land and building is purchased for a single price. So they should be allocated cost according to their stand alone fair value.

2.Tristar signed a $59,000 noninterest-bearing note: There is an imputed interest in this transaction. Asset should be recorded at present value of future cash flow of note payable (ie. PV of $59,000 next year). Notes payable should be accounted at its Face Value of $59,000 and difference is treated as Discount on notes payable.

Present value of future cash flow = $59,000 x 1/1+8% = $54,630

Discount on notes payable = $59,000 - $54,630 = $4,370

3.a truck was donated to the corporation: Contributed assets should be recorded at market value

4.paid its lawyer $7,000 : Organisational legal expenses cannot be capitalized, and should be expensed when incurred.

5.purchased maintenance equipment for cash: Frieght cost aslo should be capitalised as the same is required to bring the asset into production condition.

6.Tristar acquired various items of office equipment: Shares issued should be treated as sale of shares at face value.

7. company acquired a tract of land at a cost: There is no imputed cost. So asset is recognised at cost and notes payable at its face value.