Question

Problem 1

The following transactions are unrelated:

1. a) Equipment listed at $12,000 was purchased at terms of 4%/10, net 30. To take advantage of the discount, the company borrowed $9,000 of the purchase price by issuing a one-year 11 percent note that was repaid with interest at maturity.

2. b) Equipment with a list price of $5,000 was purchased under the terms of 2%/10, net 30. Payment was made 20 days after purchase.

3. c) A company paid $260,000 for land upon which to build a new facility. The cost to raze and remove an old building on the site of the newly proposed facility was $50,000. Usable fixtures from the old building were sold for $10,000. The company paid $3,000 to the architect that designed the new building, $30,000 for excavation of the basement, and $420,000 to a contractor for construction of the building.

Required -

Prepare journal entries for the above transactions.

Answer 1

The required journal entries for the given transactions are shown as follows:-

Journal Entries (Amounts in $)

Situation	Account Titles and Explanations	Debit	Credit
1-a	Equipment	12,000
	Accounts Payable		12,000
	(To record the purchase of equipment on credit)
1-b	Cash	9,000
	Notes Payable		9,000
	(To record the issue of note)
1-c	Accounts Payable	12,000
	Discount Received (12,000*4%)		480
	Cash (12,000-480)		11,520
	(To record the amount paid for equipment and discount availed)
1-d	Notes Payable (At Maturity)	9,000
	Interest on Notes Payable (9,000*11%)	990
	Cash		9,990
	(To record the amount paid for note at maturity with interest)
2-a	Equipment	5,000
	Accounts Payable		5,000
	(To record the purchase of equipment
2-b	Accounts Payable	5,000
	Cash		5,000
	(To record the amount paid after 20 days)
3	Land (260,000+50,000-10,000)	300,000
	Building (3,000+30,000+420,000)	453,000
	Cash		753,000
	(To record the purchase of land and building)

Working Notes:-

1) As company borrows note for availing discount, it means that payment for purchase of equipment has paid within 10 days. The discount of 4% on equipment price (i.e. 12,000) is received and credited to discount received A/c.

Notes payable are repaid on maturity along with interest of $990 ($9,000*11%).

2) In part 2, as payment for purchase of equipment is made 20 days after purchase no discount will be received (as the terms is 2% discount if payment made within 10 days).

3) The purchase cost of land, cost to raze and remove old building and sale proceeds from old building fixtures will be included in total cost of land (i.e. $260,000+$50,000-$10,000 = $300,000).

The architect fees, cost for excavation of basement and amount paid to contractor will be included in cost of new building. (i.e. $3,000+$30,000+$420,000 = $453,000).