Question

What is the correct journal entry for Big Top Tents (BTT) in recording the non-monetary transaction with Murph's Clown Shop (MCS)?

a) Dr. Party supplies $3,500, Cr. Gain on sale of tent $500, Cr. Tent $3,000
b) Dr. Tent $3,500, Dr. Cost of goods sold $2,000, Cr. Revenue $3,500, Cr. Party supplies $2,000
c) Dr. Party supplies $3,000, Cr. Gain on sale of tent $500, Cr. Tent $3,500
d) Dr. Tent $3,000, Dr. Cost of goods sold $2,000, Cr. Revenue $3,500, Cr. Party supplies $3,500

Answer 1

The correct journal entry for BTT's non-monetary exchange with MCS is to debit Party supplies for $3,500, credit Tent for $3,000, and credit Gain on sale of tent for $500.

Step-by-step explanation:

The correct journal entry for Big Top Tents (BTT) in recording the non-monetary transaction with Murph's Clown Shop (MCS) would typically include an exchange of goods or services without a cash transaction. Given the options provided, if BTT is exchanging a tent that is on its books for $3,000 (historical cost) for party supplies from MCS worth $3,500, and it is supposed to recognize a $500 gain on the exchange, the correct entry would be:

• Dr. Party supplies $3,500
• Cr. Tent $3,000
• Cr. Gain on sale of tent $500

The entry records the new asset (party supplies) at its fair value and removes the old asset (tent) from the books at its historical cost, recognizing any gain or loss on the exchange. Since the tent's book value is less than the value of the party supplies received, a gain on the sale of the tent is recognized.