During your examination of the financial statements of Martin Mfg. Co., a new client, for the year ended March 31, 20X0, you note the following entry in the general journal dated March 31, 20X0: Notes Receivable $550,000 Land $500,000 Gain on sale of land $50,000 To record sale of excess plant-site land to Ardmore Corp. for 8 percent note due five years from date. No interest payment required until maturity of note. Your review of the contract for sale between Martin and Ardmore, your inquiries of Martin executives, and your study of the minutes of Martin’s directors’ meetings uncover the following facts: (1) The land has been carried in your client’s accounting records at its cost of $500,000. (2) Ardmore Corp. is a land developer and plans to subdivide and resell the land acquired from Martin Mfg. Co. (3) Martin had originally negotiated with Ardmore on the basis of a 12 percent interest rate on the note. This interest rate was established by Martin after a careful analysis of Ardmore’s credit standing and current money market conditions. (4) Ardmore had rejected the 12 percent interest rate because the total outlay on a 12 percent note for $550,000 would amount to $880,000 at the end of five years, and Ardmore thought a total outlay of this amount would leave it with an inadequate return on the subdivision. Ardmore held out for a total cash outlay of $770,000, and Martin Mfg. Co. finally agreed to this position. During the discussions, it was pointed out that the present value of $1 due five years hence at an annual interest rate of 12 percent is approximately $0.567. Ignoring income tax considerations, is the journal entry recording Martin’s sale of the land to Ardmore acceptable? Explain fully and draft an adjusting entry if you consider one to be necessary.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
During your examination of the financial statements of Martin Mfg. Co., a new client, for the year ended March 31, 20X0, you note the following entry in the general journal dated March 31, 20X0:
Notes Receivable $550,000
Land $500,000
Gain on sale of land $50,000
To record sale of excess plant-site land to Ardmore Corp. for 8 percent note due five years from date. No interest payment required until maturity of note.
Your review of the contract for sale between Martin and Ardmore, your inquiries of Martin executives, and your study of the minutes of Martin’s directors’ meetings uncover the following facts:
(1) The land has been carried in your client’s accounting records at its cost of $500,000.
(2) Ardmore Corp. is a land developer and plans to subdivide and resell the land acquired from Martin Mfg. Co.
(3) Martin had originally negotiated with Ardmore on the basis of a 12 percent interest rate on the note. This interest rate was established by Martin after a careful analysis of Ardmore’s credit standing and current
(4) Ardmore had rejected the 12 percent interest rate because the total outlay on a 12 percent note for $550,000 would amount to $880,000 at the end of five years, and Ardmore thought a total outlay of this amount would leave it with an inadequate return on the subdivision. Ardmore held out for a total cash outlay of $770,000, and Martin Mfg. Co. finally agreed to this position. During the discussions, it was pointed out that the present value of $1 due five years hence at an annual interest rate of 12 percent is approximately $0.567.
Ignoring income tax considerations, is the
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
