Question

Kingbird Corporation wishes to exchange a machine used in its operations. Kingbird has received the following offers from other companies in the industry.

1.		Oriole Company offered to exchange a similar machine plus $23,460. (The exchange has commercial substance for both parties.)
2.		Waterway Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.)
3.		Wildhorse Company offered to exchange a similar machine, but wanted $3,060 in addition to Kingbird’s machine. (The exchange has commercial substance for both parties.)

In addition, Kingbird contacted Sheffield Corporation, a dealer in machines. To obtain a new machine, Kingbird must pay $94,860 in addition to trading in its old machine.

		Kingbird		Oriole		Waterway		Wildhorse		Sheffield
Machine cost		$163,200		$122,400		$155,040		$163,200		$132,600
Accumulated depreciation		61,200		45,900		72,420		76,500		–0–
Fair value		93,840		70,380		93,840		96,900		188,700

For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Account Titles and Explanation	Debit	Credit
1.	Kingbird Corporation
	Oriole Company
2.	Kingbird Corporation
	Waterway Company
3.	Kingbird Corporation
	Wildhorse Company
4.	Kingbird Corporation
	Sheffield Company
	(To record exchange of inventory)
	(To record cost of inventory)

Answer 1

Answer:

(1) For first situation

Journal entries in the books of Kingbird Corporation

Date	Account Titles and Explanation	Debit	Credit
	Machine - New	70,380
	Accumulated Depreciation	61,200
	loss on Exchange of machine	8,160
	Cash	23,460
	To Machine - Old		163,200
	( To record exchange of machine)

Journal entries in the books of Oriole Company

Date	Account Titles and Explanation	Debit	Credit
	Machine - New	93,840
	Accumulated Depreciation	45,900
	loss on Exchange of machine	6,120
	To Machine - Old		122,400
	To cash		23,460
	( To record exchange of machine)

Notes: a) Calculation of gain or loss on exchange of machines

Particulars	Kingbird Corporation	Oriole Company
Cost of Machine	163,200	122,400
Less : Accumulated depreciation	-61,200	-45,900
Book value of machine	102,000	76,500
Fair market value	93,840	70380
Gain or Loss on Transfer of machine ( Fair market value - Book value)	-8,160	-6,120

(2) For second situation

Journal entries in the books of Kingbird Corporation

Date	Account Titles and Explanation	Debit	Credit
	Machine - New	93,840
	Accumulated Depreciation	61,200
	loss on Exchange of machine	8,160
	To Machine - Old		163,200
	(To record exchange of machine)

Journal entries in the books of Waterway Company

Date	Account Titles and Explanation	Debit	Credit
	Machine - New	82,620
	Accumulated Depreciation	72,420
	To Machine - Old		155,040
	(To record exchange of machine)

Notes :

Value of new machine for Waterway Company = Cost of Machine - Accumulated depreciation

= 155,040 - 72,420 = 82,620

(3) For third situation

Journal entries in the books of Kingbird Corporation

Date	Account Titles and Explanation	Debit	Credit
	Machine - New	96,900
	Accumulated Depreciation	61,200
	loss on Exchange of machine	8,160
	To cash		3,060
	To Machine - Old		163,200
	( To record exchange of machine)

Journal entries in the books of Wild horse Company

Date	Account Titles and Explanation	Debit	Credit
	Machine - New	93,840
	Accumulated Depreciation	76,500
	Cash	3,060
	To Machine - Old		163,200
	To Gain on exchange		10,200
	( To record exchange of machine)

Notes: a) Calculation of gain or loss on exchange of machines

Particulars	Kingbird Corporation	Wild horse Company
Cost of Machine	163,200	163,200
Less : Accumulated depreciation	-61,200	-76,500
Book value of machine	102,000	86,700
Fair market value	93,840	96,900
Gain or Loss on Transfer of machine ( Fair market value - Book value)	-8,160	10,200

(4) For fourth situation

Journal entries in the books of Kingbird Corporation

Date	Account Titles and Explanation	Debit	Credit
	Machine - New	188,700
	Accumulated Depreciation	61,200
	loss on Exchange of machine	8,160
	To cash		94,860
	To Machine - Old		163,200
	( To record exchange of machine)

Journal entries in the books of Sheffield Company

Date	Account Titles and Explanation	Debit	Credit
	Machine - New	93,840
	Cash	94,860
	To Machine - Old		132,600
	To Gain on exchange		56,100
	( To record exchange of machine)

Notes : a) Calculation of gain or loss on exchange of machines

Particulars	Kingbird Corporation	Sheffield Company
Cost of Machine	163,200	132,600
Less : Accumulated depreciation	-61,200	0
Book value of machine	102,000	132,600
Fair market value	93,840	188,700
Gain or Loss on Transfer of machine ( Fair market value - Book value)	-8,160	56,100