Exchange of Assets
A review of the books of Snoopy Dog Biscuit Manufacturing Co. disclosed that there were five transactions involving gains and losses on the exchange of fixed assets. The transactions were recorded as indicated in the following ledger accounts.
Investigation disclosed the following facts concerning these company to company transactions:
a) Exchanged a piece of equipment with a $50,000 original cost, $20,000 book value, and $30,000 fair value for a piece of similar equipment owned by Linus Electric, which had a $60,000 original cost, $10,000 book value, and a $30,000 fair value.
b) Exchanged a machine - cost, $70,000; book value, $10,000; fair value, $40,000 - for a similar machine - fair value, $35,000 - and a "small" amount in cash, $5,000. Assume this transaction has no commercial substance.
c) Exchanged a building - cost, $150,000; book value, $40,000; fair value, $30,000 - for a building with fair value of $24,000 plus cash of $6,000.
d) Exchanged a factory building - cost, $850,000; book value, $460,000; fair value, $550,000 - for equipment owned by Schroder Inc. that had an original cost of $900,000, accumulated depreciation of $325,000, and fair value of $550,000. The transaction is deemed to have commercial substance.
e) Exchanged a patent - cost, $12,000; book value, $6,000, fair value, $3,000 - and cash of $1,000 for another patent with fair value of $4,000.
Instructions: Analyze each recorded transaction as to its compliance with generally accepted accounting principles. Assume the transactions have commercial substance unless otherwise indicated. Prepare adjusting (correcting) journal entries where required. You may assume that all transaction occurred in the current fiscal year, and all the accounts were current prior to each of the exchanges being made. You do not need to make entries for depreciation or amortization for the current year.
Place your adjusting (correcting) entries) on the next page. Please be sure to label your answers.
HINT: When I did this problem, I reconstructed each entry that was originally made, then I made the correct entry, and finally I made the adjusting (correcting) entry, if needed for each transaction. You do not need to do it this way, but if you don't know where to start, I thought I would offer a suggestion.