Question

Your solution should be in good form with amounts clearly labeled and should use appropriate account titles.

Consider each of the transactions below. All of the expenditures were made in cash.

1. The Edison Company spent $12,000 during the year for experimental purposes in connection with the development of a new product.
2. On September 1, 2011, Tristar signed a $40,000 noninterest-bearing note to purchase equipment. The $40,000 payment is due on September 1, 2012. Assume that 8% is a reasonable interest rate. The present value factor of $1: n-1, i=8% is 0.92593
3. The Mayer Company, plaintiff, paid $12,000 in legal fees in November, in connection with a successful infringement suit on its patent.
4. The Johnson Company traded its old machine with an original cost of $7,400 and a book value of $3,000 plus cash of $8,000 for a new one that had a fair value of $10,000.
5. On September 1, 2011, Tristar Company acquired five acres of land with a building that will be used as a warehouse. Tristar paid $200,000 in cash for the property. According to appraisals, the land had a fair market value of $125,000 and the building had a fair market value of $85,000. Please record the acquisition of the land and the building.

Answer 1

S.No.	Accounting entries	Debit ($)	Credit ($)
	Expenses incurred on R&D recorded
1	Research and development expense   A/c Dr	12,000
	To Cash   A/c		12,000
	Purchase of equipment using non interest bearing notes payable
2	Equipment    A/c Dr	37,037
	Discount on notes payable A/c Dr	2963
	To   Notes payable		40000
	Refer - WN-1
	Capitalising the legal fees for defence
3	Patent      A/c   Dr	19,000
	To   Cash A/c		19,000
	Trading of new equipment with old equipment and cash
4	Machine - New   A/c Dr	10,000
	Loss on trade-in   A/c Dr	1,000
	Accumulated depreciation - Machine ($7400-$3000) A/c Dr	4,400
	To Machine - Old A/c		7,400
	To Cash A/c		8,000
	Purchase of land and building, cost allocated using F.V. proportion
5	Land   A/c      Dr
	Building A/c   Dr
	To cash		200000
	( refer w.n-2)
W.N-1
	Equipment costing	40,000
A	Discount amount after 1 year = (40,000 * 8%)	3200
B	P.V. of discount @ 8% is	0.92593
C	P.V. of discount @ 8% is for discount on notes payable (A*B)	2962.98
	Equipment to be recorded exclusive of discount	37037.02
	Discount on notes payable	2962.98
	Notes payable	40,000

W.N-2
	Fair value	% of fair value	Purchase value using FV Proportion	200000
Land	125000	60%	119048
Building	85000	40%	80952
	210000