During your examination of the financial statements of Martin Mfg. Co., a new client, for the year
Question:
Your review of the contract for sale between Martin and Ardmore, your inquiries of Martin executives, and your study of the minutes of Martins directors meetings uncover the following facts:
(1) The land has been carried in your clients 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 Ardmores 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 Martins sale of the land to Ardmore acceptable? Explain fully and draft an adjusting entry if you consider one to benecessary.
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Step by Step Answer:
Principles of Auditing and Other Assurance Services
ISBN: 978-0078025617
19th edition
Authors: Ray Whittington, Kurt Pany