half of the trade creditors accepted plant and machinery at an agreed valuation of 10% less than the book value cash of 5000 at full settlement of theirs claim ?
please explain this line
Let the Trade Creditors's Balance before this transaction = Rs. 1,00,000
Also, let Plant & Machinery = Rs. 40,000
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This statement given in your question tells about the way in which settlement is decided to be made between the Creditors and the Organisation.
As per this, half of the creditors are to be settled with.
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Creditors' to be settled = 1/2 * Their Current balance = 1/2 * Rs. 1,00,000 = Rs. 50,000
These creditors have accepted:
(i) Plant & Machinery (P & M) at an agreed valuation of 10% less than its Book Value.
This means that for this part of their balance, they have not taken cash in return. Instead, they have taken an asset of the Organisation. It has been decided that its value (for the purpose of settlement) will be taken at 10% less than its Book value.
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Valuation of P & M = Book Value - 10% = Rs. 40,000 - 10% = Rs. 40,000 - Rs. 4,000 = Rs. 36,000
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(ii) Cash amount of Rs. 5,000
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in full settlement of their claims.
[ This statement means that the above (i) & (ii) things are taken in settlement of the balance of their claims of Rs. 50,000 (i.e., only half of total balance) and nothing more is remaining to be given by the Organisation for this balance. ]
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Amount given in settlement = P & M + Cash = Rs. 36,000 + Rs. 5,000 = Rs. 41,000
So, the balance of Rs. 50,000 due to the Creditors has been settled by giving them things of value of Rs. 41,000. The Orgainsation will gain Rs. 9,000 (Rs. 50,000 - Rs. 41,000) by way of Discount.
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Usual Journal Entry:
1. Trade Creditors' A/c . . . Dr. . Rs. 50,000
. . . . To Plant & Machinery A/c . . . . . . . . . . . . . . Rs. 36,000
. . . . To Cash A/c. . . . . . . . . . . . . . . . . . . . . . . . . . Rs. 5,000
. . . . To Discount Received A/c. . . . . . . . . . . . . . Rs. 9,000
(Being half of Creditors' balance settled in exchange of P & M and Cash)
