Marshall Const. Brigham Mfg. Co. (a) Assuming that this exchange is considered t
ID: 2450071 • Letter: M
Question
Marshall Const.
Brigham Mfg. Co.
(a)
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. (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.)
During the current year, Marshall Construction trades an old crane that has a book value of $110,340 (original cost $171,640 less accumulated depreciation $61,300) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham $202,290 to manufacture and is classified as inventory. The following information is also available.Marshall Const.
Brigham Mfg. Co.
Fair value of old crane $100,532 Fair value of new crane $245,200 Cash paid 144,668 Cash received 144,668Explanation / Answer
Any asset exchange with commercial substance should be accounted for using fair value (and not book value).
(1) In the books of Marshall.
Book value of old crane = $110,340
Fair value of old crane = $100,532
Cash paid = $144,668
So, Book value of old crane + Cash = $(110,340 + 144,668) = $255,008
Since this is lower than the fair value of new crane ($245,200), Marshall makes a loss of $(255,008 - 245,200) = $9,808.
Journal entry will be as follows:
DR Accumulated depreciation (Old crane) $61,300
DR Loss $9,808
DR Equipment (New Crane) $245,200
Cash $144,668
Equipment (Old crane) $171,640
(2) In the books of Brigham.
Cost of new crane = $202,290
Fair value of new crane = $245,200
Since fair value of new crane is higher than book value, Brigham makes a gain of $(245,200 - 202,290) = $42,910.
Journal entry will be as follows.
DR Cash $144,668
DR Equipment (Old crane) $100,532
Gain on asset exchange $42,910
Inventory $202,290
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