Question

Question: (Nonmonetary Exchanges) During the current year, Marshall Construction trades an old crane with a book value of \(90,000 (original cost \)140,000 less accumulated depreciation of \(50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham \)165,000 to manufacture and is classified as inventory. The following information is also available.

	Marshall Const.	Brigham Mfg. Co.
Fair value of old crane	\( 82,000
Fair value of new crane		\)200,000
Cash paid	118,000
Cash received		118,000

Instructions

1. Assuming that this exchange is considered to have commercial substance, prepare the journal entries on the books of
   1. Marshall Construction and
   2. Brigham Manufacturing.
2. Assuming that this exchange lacks commercial substance for Marshall, prepare the journal entries on the books of Marshall Construction.
3. Assuming the same facts as those in (a), except that the fair value of the old crane is \(98,000 and the cash paid is \)102,000, prepare the journal entries on the books of
   1. Marshall Construction and
   2. Brigham Manufacturing.
4. Assuming the same facts as those in (b), except that the fair value of the old crane is \(97,000 and the cash paid \)103,000, prepare the journal entries on the books of
   1. Marshall Construction and
   2. Brigham Manufacturing.

Short answer

Answer

1. 1. Loss on disposal of equipment: $8,000

2. Cost of goods sold: $165,000

b) 1. Accumulated depreciation: $50,000

2. Brigham should make the identical entry as in section (a)

c) 1. Equipment value: $200,000

2. Gain on disposal of equipment: $8,000

d) 1. Gain on Disposal of Equipment: $7,000

2. Sales revenue: $200,000

Step-by-step solution

Meaning of Non-Interest Bearing Liabilities

Non-Interest Bearing Liabilities are the sums of money due by a corporation (a debt on the balance sheet, current or non-current) that are not subject to interest or penalties. Non-Interest Bearing Liabilities, for the avoidance of doubt, do not include liabilities linked to deferred taxes, pensions, retirement, or leases.

(a1) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Equipment	200,000
	Accumulated Depreciation-Equipment	50,000
	Loss on Disposal of Equipment	8,000
	Equipment		140,000
	Cash		118,000

Working notes:

Calculation of loss on disposal of equipment.

Computation of loss
Book value of the old crane	$90,000
Less: Fair value of the old crane	82,000
Loss on disposal of equipment	$ 8,000

(a2) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Cash	118,000
	Inventory	82,000
	Sales Revenue		200,000
	Cost of Goods Sold	165,000
	Inventory		165,000

(b 1) Preparing journal entries

Since the trade resulted in a loss, Marshall Construction should record the same entry as component (a) above.

Date	Particulars	Debit ($)	Credit ($)
	Equipment	200,000
	Accumulated Depreciation-Equipment	50,000
	Loss on Disposal of Equipment	8,000
	Equipment		140,000
	Cash		118,000

(b2) Explaining the journal entry of Brigham Manufacturing

Brigham should make the identical entry as in section (a) above. Because we assume Marshall is a client, no gain is postponed. Furthermore, because the cash involved exceeds 25% of the exchange value, the entire transaction is treated as a monetary transaction, and a profit is realized.

(c1) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Equipment ($98,000 + $102,000)	200,000
	Accumulated Depreciation-Equipment	50,000
	Equipment		140,000
	Cash		102,000
	Gain on Disposal of Equipment		8,000

Working notes:

Calculation of loss on disposal of equipment.

Computation of loss
Book value of the old crane	$90,000
Less: Fair value of the old crane	82,000
Loss on disposal of equipment	$ 8,000

(c2) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Equipment ($98,000 + $102,000)	200,000
	Accumulated Depreciation-Equipment	50,000
	Equipment		140,000
	Cash		102,000
	Gain on Disposal of Equipment		8,000

(d1) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Equipment	200,000
	Accumulated Depreciation-Equipment	50,000
	Cash		103,000
	Equipment		140,000
	Gain on Disposal of Equipment		7,000

Calculation of gain on disposal of equipment.

Gain on Disposal of Equipment
Fair Value–Old	$97,000
Less:Book Value–Old	($90,000)
	$ 7,000

Note: Since the cash invested exceeds 25% of the exchange value, the gain is not delayed.

(d2) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Cash	103,000
	Inventory	97,000
	Sales Revenue		200,000
	Cost of Goods Sold	165,000
	Inventory		165,000

Note:The same reasons as those cited in (b2) above apply here:

The cash paid exceeds 25% of the total fair value. Therefore the transaction is recognized as a monetary exchange and recorded at fair value, notwithstanding the lack of commercial content. It's worth noting that a trade involving this much money is unlikely to be without business substance.