Question

PROBLEM 8.1 Problems During 2009, the following events occurred in relation to Jessica's Revals Ltd, a property developer and real estate valuation form. (a) Jessica's Revals Ltd purchased land from Denis Gibson for $ 1 000 000. This land was adjacent to, and otherwise identical to the block of land that Jessica's Revals Ltd had bought three years ago for $ 1 000 000 and had then spent an extra $50 000 improving to now have the same value as the land bought from Gibson. Record the two blocks of land in the accounts of Jessica's Revals Ltd. (b) Jessica's Revals Ltd bought 500 ordinary shares in Charmers Construction Lid for $18 000 cash on 7 September 2009. This was 5 per cent of the shares on issue by Charmers Construction Ltd. The shares are held for investment purposes. The parcel of shares had a market value of $16 000 at 31 July 2010. Record all the transactions that Jessica's Revals Ltd should record in relation to the shares. (c) At 31 July 2009, Jessica's Revals Ltd valued its current assets at $20 000 above carrying amount and its fixed assets at $600 000 above carrying amount. In both cases, the valuations were based on market values. How should the firm account for the increase in values? (d) Jessica's Revals Ltd purchased a development site for $81 000 and immediately sold that site to Kathy Pratt Real Estate for $130 000. The payment consisted of a 10-year non-interest-bearing note for $130 000. The first equal payment ($13 000) is due one year after the sale. The normal rate of interest for such a loan is 10 per cent per annum. Record the sale of the land. (e) Jessica's Revals Ltd bought bricks with a recommended retail price of $18000 and a cash price of $16500. The firm paid for the bricks by paving part of the roadway leading into the brick manufacturing plant. The cost of the paving was $12000 and the regular contract price to provide the paving was $17 000. Record the transactions. (0) Jessica's Revals Ltd issued 1000 of its ordinary shares in payment for a tract of land. The market price of the shares was $83 per share at the time of acquisition but the seller had offered to sell the land for $82 000 cash. What journal entry should the firm make to record the land purchase? on The

Answer 1

1000000 Stock-in-trade Accounts payable (Purchase of land from Denis Gibson) 1000000 18000 Investment in the shares of Charmers Construction Ltd. Cash (Purchase of 500 shares) 18000 As the above shares are held for investment purposes, therefore, they will be considered as long-term. Accordingly, they will be carried at cost only. No entry will be required in respect of decrease in the market value of such shares on 31st July 2010. 600000 Fixed asssets Revaluation surplus (Valuation of fixed assets at higher than carrying amount) 600000 There will be no impact in respect of the increase in the carrying amont of current assets as they are generally carried at cost or market price, whichever is lower. 130000 Accounts receivable Sales revenue (Sale of development site to Kathy Pratt Real Estate) 130000

130000 Note receivable Accounts receivable (Note received from Kathy Pratt Real Estate) 130000 16500 Building materials Accounts payable (Purchase of bricks) 16500 16500 Accounts payable Asset Profit 12000 4500 82000 Stock-in-trade Ordinary share capital (Issuance of shares in payment for a tract of land) 82000