Question

Shree Ltd. purchased a machine worth Rs. 3,80,000 from Heavy Machine Ltd. As per the purchase agreement, Rs. 20,000 were paid in cash and the balance was settled by issuing shares of Rs. 100 each. Give necessary journal entries in the books of Shree Ltd.

Hint:

When assets are purchased partly for cash and partly by shares, debit the asset and credit cash and share capital.

Answer 1

When Shree Ltd. purchases a machine worth Rs. 3,80,000, it becomes a capital asset for the company. As per the agreement, Rs. 20,000 is paid in cash and the remaining Rs. 3,60,000 is discharged by issuing equity shares of Rs. 100 each. Therefore, 3,600 shares will be issued. The journal entries are as follows. First, the Machine Account is debited with Rs. 3,80,000 to record the asset. Heavy Machine Ltd. is credited with the same amount to recognise the liability. Then, Cash Account is credited with Rs. 20,000 for the cash payment, and Share Capital Account is credited with Rs. 3,60,000 to record the issue of shares. After these entries, the liability to Heavy Machine Ltd. becomes fully settled.