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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Exchange of Assets Use the same information as in E10-9, except that the warehouse owned by Denver has a fair value of $28,000, and therefore, Denver agrees to pay Bristol $2,000 to complete the exchange.

Required:

Assuming the transaction has commercial substance, prepare journal entries for Denver and Bristol to record the exchange.

To determine

Record journal entries for Company D and Company B to record exchange, if exchange has commercial purpose.

Explanation

Property, Plant, and Equipment:

Property, Plant, and Equipment refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

  • To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
  • To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains

Prepare journal entry for Company D:

DateAccount titles and explanationDebit ($)Credit ($)
 Building (New Warehouse)30,000 
 Accumulated depreciation for building  55,000 
 Loss on exchange   (2)    7,000
      Building ( Old Warehouse) 90,000
      Cash 2,000
  (To record the exchange with commercial purpose)  

Table (1)

  • Building (New Warehouse) is an asset and it is increased. Therefore, debit building (New Warehouse) account by $30,000.
  • Accumulated depreciation is a contra asset account and it is decreased. Therefore, debit accumulated depreciation account by $55,000.
  • Loss on exchange is a component of stockholders’ equity and it is decreased. Therefore, debit loss on exchange account by $7,000.
  • Building (Old Warehouse) is an asset and it is decreased. Therefore, credit building (Old Warehouse) account by $90,000.
  • Cash is an asset and it is decreased. Therefore, credit cash account by $2,000.

Prepare journal entry for Company B:

DateAccount titles and explanationDebit ($)Credit ($)
 Cash2,000 
 Building (New Warehouse)28,000 
 Accumulated depreciation for building25,000 
      Building ( Old Warehouse) 45,000
      Gain on exchange (3) 10,000
 (To record the exchange with commercial purpose)  

Table (2)

  • Cash is an asset and it is increased. Therefore, debit cash account by $2,000.
  • Building (New Warehouse) is an asset and it is increased. Therefore, debit building (New Warehouse) account by $30,000.
  • Accumulated depreciation is a contra asset account and it is decreased. Therefore, debit accumulated depreciation account by $25,000.
  • Building (Old Warehouse) is an asset and it is decreased. Therefore, credit building (Old Warehouse) account by $45,000.
  • Gain on exchange is a component of stockholders’ equity and it is increased. Therefore, credit gain on exchange account by $10,000...

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