Chapter 10, Problem 10.1P

To determine

Property, Plant, and Equipment:

Property, Plant, and Equipment refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

To Prepare: Journal entries for each of the given transactions.

Explanation of Solution

1.

Journal entry to record the acquisition costs of the land, and building:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Land		62,500
	Building		37,500
	Cash			100,000
	(To record the acquisition costs of land and building.)

Table (1)

• Land is an asset account, and it is increased by $62,500. Therefore, debit Land account with $62,500.
• Building is an asset account, and it is increased by $37,500. Therefore, debit Land account with $37,500.
• Cash is an asset account, and it is decreased by $100,000. Therefore, credit Cash account with $100,000.

Working note

Determine the initial value of land and building.

Cash paid for the property is $100,000.

Asset	Fair value ($)	Percent of Total fair value (%)	Initial valuation ($)
Land	75,000	62.5%	62,500
Building	45,000	37.5%	37,500
Total	120,000	100.0%	100,000

Table (2)

$\text{Percent of total fair value = }\frac{\text{Fair value of land / building}}{\text{Total}\text{fair}\text{value}}$

$\text{Initital valuation = Percent of total fair value }\times \text{ Cash paid for the property}$

2.

Journal entry to record the acquisition of equipment on note:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Equipment		37,037
	Discount on note payable		2,963
	Note payable			40,000
	(To record the acquisition of equipment.)

Table (3)

• Equipment is an asset account,and it is increased by $37,037. Therefore, debit Equipment account with $37,037.
• Discount on note payable is a contra liability account,and increased by $2,963. Hence, debit the Discount on note payable account with $2,963.
• Note Payable is a liability account, and is increased by $40,000. Therefore, credit the Note payable account with $40,000.

Working note:

Determine the present value of note payments.

$\begin{array}{c}\text{Present value = Note payable}\times \text{Present value of \$1 }\\ =\$40,000\times \text{.92593}\\ =\$37,037\end{array}$

Note: PV factor (Present value of $1: n = 1, i =8%) is taken from the table value (Table 2 in Appendix from textbook).

Determine the discount on note payable.

$\begin{array}{c}\text{Discount on note payable = Note payable – Present value of equipment }\\ \text{= \$40,000 – \$37,037}\\ \text{=\$2,963}\end{array}$

3.

To Prepare: The journal entry to record the acquisition of a truck by donation.

Solution:

Journal entry to record the acquisition of a truck by donation:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Truck		2,500
	Revenue – donation of asset			2,500
	(To record the acquisition cost of a truck by donation.)

Table (4)

• Truck is an asset account,and it is increased by $2,500. Therefore, debit Truck account with $2,500.
• Revenue – Donation of asset is a component of equity, and increased by $2,500. Therefore, credit Revenue – Donation of asset account with $2,500.

4.

Journal entry to record the capitalization of organization costs:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Organization cost expense		3,000
	Cash			3,000
	(To record the organization cost expense.)

Table (5)

• Organization cost expense is an expense account. Expenses and losses reduce Equity value. Therefore, debit Organization cost expense with $3,000.
• Cash is an asset account. The amount has decreased because cash is paid for the expenditures incurred. Therefore, credit Cash account with $3,000.

5.

Journal entry to record the purchase of equipment:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Maintenance Equipment		15,500
	Cash			15,500
	(To record the purchase of equipment.)

Table (6)

• Equipment is an asset account, and it is increased by $15,500. Therefore, debit Equipment account with $15,500.
• Cash is an asset account, and it is decreased by $15,500. Therefore, credit Cash account with $15,500.

Working note:

Determine the value of equipment.

$\begin{array}{c}\text{Equipment = Purchase price + Freight charges }\\ =\$15,000+\$500\\ =\$15,500\end{array}$

6.

Journal entry to record the acquisition of office equipment in exchange of common stock:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Office Equipment		5,500
	Common stock			5,500
	(To record the acquisition costs of office equipment in exchange of common stock.)

Table (7)

• Office equipment is an asset account, and it is increased by $5,500. Therefore, debit Office equipment account with $5,500.
• Common stock is a component of equity and it is increased by $5,500. Therefore, credit common stock account with $5,500.

7.

Journal entry to record the acquisition of land in exchange cash and note payable:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Land		20,000
	Cash			2,000
	Note payable			18,000
	(To record the acquisition costs of land in exchange of cash and note payable.)

Table (8)

• Land is an asset account, and it is increased by $20,000. Therefore, debit Land account with $20,000.
• Cash is an asset account, and it is decreased by $2,000. Therefore, credit Cash account with $2,000
• Note Payable is a liability account, and is increased by $18,000. Therefore, credit the Note payable account with $18,000.

Working note

Determine the amount of note payable.

$\begin{array}{l}\text{Total value of land = Cash paid + Note payable }\\ \$20,000=\$2,000+\text{Note payable }\\ \text{Note payable = }\$20,000-\$2,000\\ \text{Note payable = \$18,000}\end{array}$