Chapter 10, Problem 5P

Assets Acquired by Exchange Bremer Company made the following exchanges of assets during 2019:

1. 1. Acquired a more advanced machine worth $10,000 by paying $2,000 cash and giving up a machine that had originally cost $40,000 and has a book value of $12,000,
2. 2. Acquired a building worth $55,000 by paying $5,000 cash and giving up a piece of land that had originally cost $35,000.
3. 3. Acquired a more advanced machine worth $20,000 by paying $5,000 cash and giving up a machine that had originally cost $13,000 and has a book value of $11,000.
4. 4. Acquired a car by giving up a truck that had originally cost $20,000, has a book value of $15,000, and has a “blue book” value of $16,800. In addition, the company received $1,000 cash.

Required:

Prepare Bremer’s journal entry for each exchange. Assume all exchanges were determined to have commercial substance.

To determine

Journalize entries for each exchange.

Explanation of Solution

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 entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
	Machine (new)	10,000
	Accumulated depreciation for machine (1)	28,000
	Loss on exchange (2)	4,000
	Machine (old)		40,000
	Cash		2,000
	(To record improvements made to machine)
	Building	55,000
	Land		35,000
	Cash		5,000
	Gain on exchange (3)		15,000
	(To record acquisition of building by exchanging machine)
	Machine (new)	20,000
	Accumulated depreciation for machine (4)	2,000
	Machine (old)		13,000
	Cash		5,000
	Gain on exchange (5)		4,000
	(To record the replacement of machine)
	Equipment (car) (6)	15,800
	Accumulated depreciation for truck	5,000
	Cash	1,000
	Equipment (truck)		20,000
	Gain on exchange (7)		1,800
	(To record the acquisition of car by exchanging truck)

Table (1)

To record improvements made to machine:

• Machine (new) is an asset and it is increased. Therefore, debit machine account by $10,000.
• Accumulated depreciation for machine is a contra asset account and it is decreased. Therefore, debit accumulated depreciation for machine account by $28,000.
• Loss on exchange is a component of stockholders’ equity and it is decreased. Therefore, debit loss on exchange account by $4,000.
• Machine (old) is an asset and it is decreased. Therefore, credit machine account by $40,000.
• Cash is an asset and it is decreased. Therefore, credit cash account by $2,000.

To record acquisition of building by exchanging machine:

• Building is an asset and it is increased. Therefore, debit building account by $55,000.
• Land is an asset and it is decreased. Therefore, credit Land account by $35,000.
• Cash is an asset and it is decreased. Therefore, credit cash account by $5,000.
• Gain on exchange is a component of stockholders’ equity and it is increased. Therefore, credit gain on exchange account by $15,000.

To record the replacement of machine:

• Machine (new) is an asset and it is increased. Therefore, debit machine account by $20,000.
• Accumulated depreciation for machine is a contra asset account and it is decreased. Therefore, debit accumulated depreciation for machine account by $2,000.
• Machine (old) is an asset and it is decreased. Therefore, credit machine account by $13,000.
• Cash is an asset and it is decreased. Therefore, credit cash account by $5,000.
• Gain on exchange is a component of stockholders’ equity and it is increased. Therefore, credit gain on exchange account by $1,800.

To record the acquisition of car by exchanging truck:

• Equipment (car) is an asset and it is increased. Therefore, debit equipment account by $15,800.
• Accumulated depreciation for truck is a contra asset account and it is decreased. Therefore, debit Accumulated depreciation for truck account by $5,000.
• Cash is an asset and it is increased. Therefore, debit cash account by $1,000.
• Equipment (truck) is an asset and it is decreased. Therefore, credit Equipment (truck) account by $20,000.
• Gain on exchange is a component of stockholders’ equity and it is increased. Therefore, credit gain on exchange account by $1,800.

Working notes:

(1)Calculate the accumulated depreciation of machine:

$\begin{array}{c}\text{Accumulated}\text{depreciation}\text{=}\text{Original}\text{cost}-\text{Book}\text{value}\\ \text{=\$40,000}-\text{\$12,000}\\ \text{=\$28,000}\end{array}$

(2)Calculate the loss on exchange:

$\begin{array}{c}\text{Loss}\text{on}\text{exchange}\text{=}\left(\begin{array}{l}\text{Fair}\text{value}\text{of}\text{asset}\text{surrendered}-\\ \text{Cash}\text{paid}-\text{Book}\text{value}\text{of}\text{asset}\text{surrendered}\end{array}\right)\\ \text{=\$10,000}-\text{\$2,000}-\text{\$12,000}\\ \text{=(\$4,000)}\end{array}$

(3)Calculate the gain on exchange:

$\begin{array}{c}\text{Gain}\text{on}\text{exchange}\text{=}\left(\begin{array}{l}\text{Fair}\text{value}\text{of}\text{asset}\text{surrendered}-\\ \text{Cash}\text{paid}-\text{Book}\text{value}\text{of}\text{asset}\text{surrendered}\end{array}\right)\\ \text{=\$55,000}-\text{\$5,000}-\text{\$35,000}\\ \text{=\$15,000}\end{array}$

(4)Calculate the accumulated depreciation of machine:

$\begin{array}{c}\text{Accumulated}\text{depreciation}\text{=}\text{Original}\text{cost}-\text{Book}\text{value}\\ \text{=\$13,000}-\text{\$11,000}\\ \text{=\$2,000}\end{array}$

(5)Calculate the gain on exchange:

$\begin{array}{c}\text{Gain}\text{on}\text{exchange}\text{=}\left(\begin{array}{l}\text{Fair}\text{value}\text{of}\text{asset}\text{surrendered}-\\ \text{Cash}\text{paid}-\text{Book}\text{value}\text{of}\text{asset}\text{surrendered}\end{array}\right)\\ \text{=\$20,000}-\text{\$5,000}-\text{\$15,000}\\ \text{=\$4,000}\end{array}$

(6)Calculate the cost of the equipment:

$\begin{array}{c}\text{Cost}\text{of}\text{the}\text{equipement}\text{=}\text{Fair}\text{value}\text{of}\text{asset}\text{surrendered}-\text{Cash}\text{received}\\ \text{=\$16,800}-\text{\$1,000}\\ \text{=\$15,800}\end{array}$

(7)Calculate the gain on exchange:

$\begin{array}{c}\text{Gain}\text{on}\text{exchange}\text{=}\left(\begin{array}{l}\text{Fair}\text{value}\text{of}\text{asset}\text{surrendered}-\\ \text{Book}\text{value}\text{of}\text{asset}\text{surrendered}\end{array}\right)\\ \text{=\$16,800}-\text{\$15,000}\\ \text{=\$1,800}\end{array}$