Question

The City of Metropolis agrees to pay 10% of the cost of a building to encourage Mega Corp. to relocate to its city. The total cost of the building was $5,000,000, and Mega agrees to pay the remaining amount in cash. The journal entry for Mega Corp to record this transaction includes which of the following entries? (Select all that apply.)

1) credit to other comprehensive income $500,000
2) credit to cash $5,000,000
3) credit to cash $4,500,000
4) debit to donated assets $500,000
5) credit to donated assets $5,000,000
6) credit to revenue $500,000
7) debit to building $5,000,000

Answer 1

Mega Corp would record the transaction as a debit to the building for $5,000,000, a credit to cash for $4,500,000, and a credit to revenue for $500,000 to reflect the city's contribution as revenue. The correct journal entries are 3), 6), and 7).

Step-by-step explanation:

The student's question revolves around the correct journal entry for Mega Corp to record a transaction where the City of Metropolis agrees to pay 10% of the cost of a building to encourage the corporation's relocation. The total cost of the building is $5,000,000. In accounting terms, Mega Corp would record the incentive as a donated asset, which is a non-monetary contribution, at fair value. Therefore, the correct entries would be:

• A debit to the building account for the full amount of the building: $5,000,000, reflecting the asset's full value.
• A credit to cash for the amount Mega Corp pays: $4,500,000, which is the total cost minus the contribution from the city.
• A credit to revenue for the value of the city's contribution: $500,000, which reflects the income generated from the donation.

The correct entries from the options provided are 3), 6), and 7).