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:

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 benecessary.

  • CreatedOctober 27, 2014
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