Question

Reema has a $800 as a book value for its supplies while its fair value is $650 prior to the formation of its partnership with Haifa. When Reema invests her supplies in the partnership, the supplies should be recorded as:

Select one:

a. Dr. Supplies $150

b. Dr. Supplies $1,450

c. Dr. Supplies $800

d. Dr. Supplies $650

Dena and Ruba are forming a partnership. Dena is transferring 60,000 SR of personal cash to the partnership. Ruba owns a truck that has a book value of 100,000 SR and fair value of 150,000 SR, which she transfers to the partnership; the accumulated depreciation for the truck was 5000 SR. To journalize Ruba’s investment:

Select one:

a.

Dr. Equipment (truck) 150,000

       Cr. Ruba’s Capital 150,000

b.

Dr. Equipment (truck) 150,000

       Cr. Accumulated Depreciation 5,000

       Cr. Ruba’s Capital 145,000

c.

Dr. Equipment (truck) 100,000

       Cr. Accumulated Depreciation 5,000

       Cr. Ruba’s Capital 95,000

d.

Dr. Equipment (truck) 100,000

       Cr. Ruba’s Capital 100,000

Answer 1

Assets are to be recorded at book value or fair value whichever is lower as per cost principle.

i.e., even if the assets fair market value is greater than the book value it has to be recorded at book value , but when the asset fair value is less than the book value, then we have to recognise the loss and show the asset at fair value

d. Dr supplies $650

In this case even if the book value is $800, the fair value of the asset while forming the partnership is $650. hence it would not be conservative to record the asset at $800, because the net realisable value of the asset on that day is $650 and hence recorded at $650.

c. Dr Equipment 100000

CrTo accumulated depreciation 5000

CrTo Ruba's capital 95000

In this case equipment's fair value is 150000 but the book value is 100000, hence it has to be recorded at book value as it is lower.

But the equipment already has a accumulated depreciation of 5000 while forming a partnership, hence the carrying value of 100000-5000=95000 is ruba's capital and this 5000 is to be reduced from equipment(100000)