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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 E-12, except that the machine has a market value of $8,500, and, therefore, Goodman agrees to pay $500 to complete the exchange.

Required:

Prepare journal entries for Goodman and Harmes to record the exchange.

To determine

Journalize entries to record the exchange for Company G and Company H.

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 G:

DateAccount titles and explanationDebit ($)Credit ($)
 Truck (1)9,000 
 Accumulated depreciation for machine (3)  24,000 
      Gain on exchange   (2)2,500
      Machine 30,000
      Cash 500
  (To record the exchange with commercial substance)  
    

Table (1)

  • Truck is an asset and it is increased. Therefore, debit truck account by $9,000.
  • Accumulated depreciation for machine is a contra asset account and it is decreased. Therefore, debit accumulated depreciation for machine account by $24,000.
  • Gain on exchange is a component of stockholders’ equity and it is increased. Therefore, credit gain on exchange account by $2,500.
  • Machine is an asset and it is decreased. Therefore, credit machine account by $30,000.
  • Cash is an asset and it is decreased. Therefore credit cash account by $500.

Prepare journal entry for Company H:

DateAccount titles and explanationDebit ($)Credit ($)
 Machine (4)8,500 
 Cash500 
 Accumulated depreciation for truck (5)  4,000 
      Gain on exchange   (6)    1,000
      Truck 12,000
  (To record the exchange with commercial substance)  
    

Table (2)

  • Machine is an asset and it is increased. Therefore, debit machine account by $8,500.
  • Cash is an asset and it is increased. Therefore debit cash account by $500.
  • Accumulated depreciation for truck is a contra asset account and it is decreased. Therefore, debit accumulated depreciation for truck account by 4,000.
  • Gain on exchange is a component of stockholders’ equity and it is increased. Therefore, credit the  gain on exchange account by $1,000.
  • Truck is an asset and it is decreased. Therefore, credit truck account by $12,000...

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