Question

(Nonmonetary Exchanges) Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry.

1. Dorsett Company offered to exchange a similar machine plus \(23,000. (The exchange has commercial substance for both parties.)
2. Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.)
3. Liston Company offered to exchange a similar machine, but wanted \)3,000 in addition to Holyfield’s machine. (The exchange has commercial substance for both parties.)

In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay \(93,000 in addition to trading in its old machine.

	Holyfield	Dorsett	Winston	Liston	Greeley
Machine cost	\)160,000	\(120,000	\)152,000	\(160,000	\)130,000
Accumulated depreciation	60,000	45,000	71,000	75,000	–0–
Fair value	92,000	69,000	92,000	95,000	185,000

Instructions

For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.

Short answer

1. Holyfield corporation- loss on disposal machinery =$8,000
2. Dorsett- loss on disposal machinery =$6,000
3. Winston-gain deferred = $11,000
4. Liston- gain on disposal of machinery =$10,000
5. Greely-sales revenue =$185,000

Step-by-step solution

Meaning of Non-Interest Bearing Liabilities

Journal entry refers to recording business transactions in the books of accounts in the manner in which the transactions occurred.

Step 2:Preparing journal entries

In the books of HolyfieldCorporation

Date	Particulars	Debit ($)	Credit ($)
	Cash	23,000
	Machinery	69,000
	Accumulated Depreciation-Machinery	60,000
	Loss on Disposal of Machinery	8,000
	Machinery		160,000

Working notes:

Computation of loss on disposal of machinery

Computation of loss: Book value$\left(\$160,000-\$60,000\right)$	$100,000
Less: Fair value	92,000
Loss	$ 8,000

In the books of the Dorsett Company

Date	Particulars	Debit ($)	Credit ($)
	Machinery	92,000
	Accumulated Depreciation-Machinery	45,000
	Loss on Disposal of Machinery	6,000
	Cash		23,000
	Machinery		120,000

Working notes:

Computation of loss on disposal of machinery

Computation of loss: Book value$\left(\$120,000-\$45,000\right)$	$75,000
Less: Fair value	69,000
Loss	$ 6,000

Preparing journal entries

In the books of HolyfieldCorporation

Date	Particulars	Debit ($)	Credit ($)
	Machinery	92,000
	Accumulated Depreciation-Machinery	60,000
	Loss on Disposal of Machinery	8,000
	Machinery		160,000

In the books of the Winston Company

Date	Particulars	Debit ($)	Credit ($)
	Machinery$\left(\$92,000-\$11,000\right)$	81,000
	Accumulated Depreciation-Machinery	71,000
	Machinery		152,000

Working notes:

Computation of gain deferred:

Fair value	$92,000
Less: Book value$\left(\$152,000-\$71,000\right)$	81,000
Gain deferred	$11,000

Preparing journal entries

In the books of HolyfieldCorporation

Date	Particulars	Debit ($)	Credit ($)
	Machinery	95,000
	Accumulated Depreciation-Machinery	60,000
	Loss on Disposal of Machinery	8,000
	Machinery		160,000
	Cash		3,000

In the books of the Liston Company

Date	Particulars	Debit ($)	Credit ($)
	Machinery	92,000
	Accumulated Depreciation-Machinery	75,000
	Cash	3,000
	Machinery		160,000
	Gain on Disposal of Machinery		10,000

Working notes:

Computation of gain on disposal of machinery

Fair value	$ 95,000
Less: Book value	85,000
Gain	$ 10,000

Note:The whole gain should be recorded since the trade has commercial value.

Preparing journal entries

In the books of HolyfieldCorporation

Date	Particulars	Debit ($)	Credit ($)
	Machinery	185,000
	Accumulated Depreciation-Machinery	60,000
	Loss on Disposal of Machinery	8,000
	Machinery		160,000
	Cash		93,000

In the books of the Greeley Company

Date	Particulars	Debit ($)	Credit ($)
	Cash	93,000
	Inventory	92,000
	Sales Revenue		185,000
	Cost of Goods Sold	130,000
	Inventory		130,000