Busytown Corporation, which manufactures shoes, hired a recent college graduate

Question

Busytown Corporation, which manufactures shoes, hired a recent college graduate to work in its accounting department. On the first day of work, the accountant was assigned to total a batch of invoices with the use of an adding machine. Before long, the accountant, who had never before seen such a machine, managed to break the machine. Busytown Corporation gave the machine plus $753 to Dick Tracy Business Machine Company (dealer) in exchange for a new machine. Assume the following information about the machines.

Busytown Corp.
(Old Machine)

Dick Tracy Co.
(New Machine)

For each company, prepare the necessary journal entry to record the exchange. (The exchange has commercial substance)

Account Titles and Explanation

                                                       Debit

                                      Credit

Busytown Corporation

1)

2)

3)

4)

5)

Dick Tracy Business Machine Company

1)

2)

3)

4)

5)

  

  

Busytown Corp.
(Old Machine)

Dick Tracy Co.
(New Machine)

Machine cost $642 $598 Accumulated depreciation 310 –0– Fair value 188 941

Explanation / Answer

Journal entry in the books of Busytown Corp.
:

Account Titles and Explanation

Debit

Credit

New Machine (Fair Value)

$ 941.00

Accumulated Depreciation (Old Machine)

$ 310.00

Loss on Exchange (642+753-941-310)

$ 144.00

Old Machine (Cost )

$ 642.00

Cash

$ 753.00

(Being Old Machine exchanged and additional cash paid)

Journal entry in the books of Dick Tracy Co.:

Account Titles and Explanation

Debit

Credit

Old Machine (Fair Value)

$ 188.00

Cash

$ 753.00

Gain on Exchange (188+753-598)

$ 343.00

New Machine (Cost )

$ 598.00

(Being New Machine exchanged and additional cash received)

Journal entry in the books of Busytown Corp.
:

Account Titles and Explanation

Debit

Credit

New Machine (Fair Value)

$ 941.00

Accumulated Depreciation (Old Machine)

$ 310.00

Loss on Exchange (642+753-941-310)

$ 144.00

Old Machine (Cost )

$ 642.00

Cash

$ 753.00

(Being Old Machine exchanged and additional cash paid)

Journal entry in the books of Dick Tracy Co.:

Account Titles and Explanation

Debit

Credit

Old Machine (Fair Value)

$ 188.00

Cash

$ 753.00

Gain on Exchange (188+753-598)

$ 343.00

New Machine (Cost )

$ 598.00

(Being New Machine exchanged and additional cash received)

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