Question

Paltrow Corporation follows a policy of a 10% depreciation charge per year on all machinery
and a 5% depreciation charge per year on buildings. The following transactions occurred in
2019:

5 April 2019 -- Paltrow issued 1,000 shares of its no par common stock in exchange for
the equipment. The market value of the common stock was not
determinable. The equipment could have been purchased for $24,000 in
cash.

31 March 2019 -- Negotiations which began in 2018 were completed and a warehouse
purchased 1/1/2018 (depreciation has been properly charged through
December 31, 2018) at a cost of $3,200,000 with a fair market value of
$2,000,000 was exchanged for a second warehouse which also had a fair
market value of $2,000,000. The exchange had no commercial substance.
Both parcels of land on which the warehouses were located were equal in
value, and had a fair value equal to book value.

30 June 2019 -- Machinery with a cost of $240,000 and accumulated depreciation through
January 1 of $180,000 was exchanged with $150,000 cash for a parcel of
land with a fair market value of $230,000.

1 August 2019 -- Paltrow Company purchased two buildings on four acres of land. The
lump-sum purchase price was $900,000. According to independent
appraisals, the fair values were $450,000 (building A) and $250,000
(building B) for the buildings and $300,000 for the land.

Required
Prepare all appropriate journal entries for Paltrow Corporation for the above dates.

Answer 1

INFORMATION GIVEN IN QUESTION:

4 TRANSACTIONS OF ASSET PURCHASE, SALE & EXCHANGE IN 2019 ARE GIVEN TO PASS JOURNAL ENTRIES.

ANSWER:

DATE	PARTICULARS	L/F NO	DEBIT $	CREDIT $
05.04.2019	EQUIPMENT A/C		24,000
	TO COMMON STOCK SHARE CAPITAL			24,000
	[Being Purchased Equipment against issue of 1000 common stock shares] Assumption: Par value per share is not known, hence entire amount is recorded in COMMON STOCK SHARE CAPITAL
31.03.2019	WAREHOUSE ( NEW) A/C		2,000,000
	PROFIT & LOSS A/C (loss) ( bal figure)		1,000,000
	TO WAREHOUSE (OLD) (refer w.n.1)			3,000,000
	[Being purchased new Warehouse in exchange for Old warehouse]
30.06.2019	LAND A/C		230,000
	TO MACHINERY A/C (refer w.n. 2)			48,000
	TO CASH A/C			150,000
	TO PROFIT & LOSS A/C (gain) (bal figure)			32,000
	[Being Purchased Land in exchange for Machinery & part paid in cash]
01.08.2019	BUILDING "A" A/C		405,000
	BUILDING "B" A/C		225,000
	LAND A/C		270,000
	TO CASH / BANK A/C			900,000
	[Being purchased Building A, B and Land at a lump sum price of $ 900,000 apportioned in the ratio of fair values] (refer w.n.3)

WORKING NOTES:

1.BOOK VALUE OF OLD WAREHOUSE ON 31.03.2019

COST ON 01.01.2018	3,200,000
(-) Depreciation for 2018 @ 5%	(160,000)
(-) Depreciation for 3 months of 2019	(40,000)
BOOK VALUE ON 31.03.2019	3,000,000

2. BOOK VALUE OF MACHINERY ON 30.06.2019:

COST	240,000
(-) Accumulated Depreciation upto 2018	(180,000)
(-) Depreciation for 6 months of 2019 @ 10% [240,000 x 10% x 6/12]	(12,000)
BOOK VALUE ON 30.06.2019	48,000

3. APPORTIONMENT OF PURCHASE PRICE IN THE RATIO OF FAIR VALUES:

BUILDING “A” = 450,000, BUILDING “B” = 250,000 & LAND = 300,000

TOTAL FAIR VALUE = 1,000,000

APPORTIONMENT OF PURCHASE PRICE OF $ 900,000 IN THE RATIO OF FAIR VALUE

BUILDING “A” = 900,000 X (450,000 / 1,000,000) = $ 405,000

BUILDING “B” =900,000 X (250,000 / 1,000,000) = $ 225,000

LAND = 900,000 X (300,000 / 1,000,000) = $ 270,000