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Journal entries: Istaimy purchase of Erchetal partnership

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The following is the Balance sheet of the Erchetai partnership at 30 April 2002

$ $50,000
Good will 928,000
Tangible fixed assets 978,000

Current Assets
Stock 40,000
Debtors 76,000
Bank 80,000

Less Current Liabilities 29,000
Long term liability
Loan carrying interest at 8% per annum 100,000

Partners Capital 1,045,000

On 30 April 2002 Istaimy plc acquired the business of the Erchetal partnership. The following maters were taken in to consideration in fixing the terms of the acquisition.

1. No depreciation had been provided on freehold buildings. It was agreed that a provision of $128,000 should have been made.

2. On 1 April 2002 Erchetai had purchased a machine. The cost was $60,000. $20,000 was paid immediately. The balance is payable by four equal installments on 1 May,1 June, 1 July and 1 August, together with interest at the rate of 12% per annum. Only the initial payment of $20,000 had been recorded in the partnerships books. It was Erchetais policy to depreciate machinery at the rate of 15 per cent per annum on cost, and to provide for full years depreciation in the year of purchase.

3. A debtors owing $5000 at 30 April at 30 April 2002 has since become bankrupt. Erchetai has been advised that a dividend of 20 per cent will be paid.

Stock has been valued at cost investigation shows that if stock had been valued at net realizable value it would
have been valued at $28,000 If separate valuation at the lower of cost and net realizable value had been applied to each
item of stock it would have been valued at $30,000.

The purchase consideration was satisfied as follows.
The long term loan was satisfied by the issue of $80 of 10% debenture stock 2008/10 for every $100 of the loan.

The partners were issued, for every $50.00 of capital with 3 X 8 percent preference shares at $1.20 per share,
and 3 ordinary shares of $10.00 each at $12.50

Prepare the journal entry to record the purchase of the partnership business in the books of Istaimy plc.
Your answer should include cash transactions.

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Solution Summary

The solution describes the process of preparing journal entries for the acquisition and discloses the account names.

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The journal is essentially a chronological record of accounting transactions. Entries in the journal are a record of the various debits and credits that took place- they having to match in value by the basic accounting precept.

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