Problems

(For a full outline of problems, please see the text.)

8. 1 During 2004, the following events occurred in relation to Jessica’s Revals Ltd, a
property developer and real estate valuation firm.
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 for $1 000 000 3 years ago 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 Ltd for $18
000 cash on 7 September 2004. This was 5% 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 2005. Record all the transactions that Jessica’s
Revals Ltd should record in relation to the shares.
c. At 31 July 2004, 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 1 year
after the sale. The normal rate of interest for such a loan is 10% p.a. Record the sale of
the land.
e. Jessica’s Revals Ltd bought bricks with a recommended retail price of $18 000 and a
cash price of $16 500. The firm paid for the bricks by paving part of the roadway leading
into the brick manufacturing plant. The cost of the paving was $12 000 and the regular
contract price to provide the paving was $17 000. Record the transactions.
f. 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?

The purpose of this problem is to show that determining cost or value in practice is not always
simple.
a. The question indicates that the two blocks of land have identical values. As such, the
appropriate entries would be:
Land $1 000 000
Cash/other consideration $1 000 000
Unrealised loss on land value. 50 000
Land 50 000
b. This is a short-term investment, because Jessica’s Revaluations Pty Ltd intends to sell
the shares whenever it needs the cash. According to ASRB 1016, the lower of cost of
market methods is to be used.
7 Sept 2004 Marketable securities $18 000
 Cash $18 000
31 July 2005 Unrealised loss 2000
Allowance for price decline 2000
c. If Jessica’s Revals Ltd applies a strict historical cost measurement system, it can do
nothing about these increases in value, because to do so would violate the historical
cost principle. However, according to SAP 1, the current costs of the non-monetary
assets are encouraged to be disclosed as supplementary information. Under the mixed
measurement system in use by the vast majority of firms, the entry is not clear, because
there is no standard governing the accounting for current assets in general. We
recommend the following entry if the firm adopts a mixed measurement system:
July 31 Assets $620 000
Asset revaluation reserve $600 000
Unrealised gain on current assets
(revenue) 20 000
d. Initial acquisition:
July 31 Land $81 000
Cash/other consideration $81 000
The present value of the note must be recorded. Using the present value of an ordinary
annuity for 10 periods at 10%, the present value is:
$13 000 × 6.144567 = $79 879

Notes receivable $79 879

Loss on Sale of Land 1 121
Land $81 000
Jessica’s Revals Ltd will have interest revenue to record each year.
e. ASRB 1015 is relevant. There is an exchange of dissimilar non-monetary assets, and
therefore the earning process is assumed to be complete. This transaction can be
considered a sale. If it is objectively determinable, the value of the asset given should be
the basis for determining the value of the asset received. Assuming Jessica’s Revals Ltd
works for others at an established sales price, the contract price of $17 000 can be
considered objectively determinable.

A case could be made for recording the bricks at $16 500. This is a lower figure, and on
the basis of conservatism it can be argued that it should be recorded. However, following
the cost principle, the asset received should be at what is sacrificed, which in this case is
$17 000 worth of inventory. By paving the bricks, Jessica’s Revals Ltd is forgoing $17
000 in revenue from another contract. Hence, this is the cost.
Materials (Bricks) $17 000
Sales revenue $17 000
Cost of goods sold 12 000
Inventory, labour, etc. 12 000
f. There are two choices here: to record the land at $83 000 or $82 000. Following the
cost principle, the land should be stated at $83 000 because that is what was sacrificed:
1000 shares at $83 per share. There is a question as to whether 1000 shares constitute
such a large number that the share price would be affected. Assuming that 1000 shares
would not materially affect the share price, and given that the market quotation can be
relied upon because it is from the Sydney Stock Exchange, the $83 000 represents the
cost of the land.
Land $83 000
Paid-up capital (1000 × $50) $83 000