Question

P1o.8 (LO 3) (Nonmonetary Exchanges) Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry. 1. Dorsett Company offered to exchange a similar machine plus $23,000. (The exchange has commercial substance for both parties.) 2. Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) 3. Liston Company offered to exchange a similar machine, but wanted $3,000 in addition to Holyfield's machine. (The exchange has commercial substance for both parties.) In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay $93,000 in addition to trading in its old machine.

Answer 1

This question relates to nonmonetary exchanges in business, focusing on Holyfield Corporation's offers to exchange a machine in its operations with other companies in the industry, as well as considering the option of trading with a dealer. The question provides scenarios involving exchanges with and without commercial substance, as well as additional costs involved in obtaining a new machine.

Step-by-step explanation:

The subject of this question relates to nonmonetary exchanges in the business context. Holyfield Corporation is considering exchanging a machine used in its operations with other companies in the industry. The offers include exchanging a similar machine for Holyfield's machine with some additional monetary considerations.

This scenario demonstrates how companies engage in nonmonetary exchanges to acquire assets they need for their operations. These exchanges can have commercial substance or lack it, depending on the specific terms and conditions agreed upon. Holyfield also explores the option of trading their old machine with Greeley Corporation to obtain a new one, incurring additional costs.

Answer 2

Recommendation: Based on the information provided, Holyfield should accept the offer from Dorsett Company as it offers the most favorable net cost and commercial substance.

Holyfield Corporation's Machine Exchange Options:

Exchange Offers:

Company Offer Commercial Substance Net Cost

Dorsett Similar machine + $23,000 Yes $70,000

Winston Similar machine No N/A

Liston Similar machine - $3,000 Yes $96,000

Buying New Machine:

| Cost |

|---|---|

| New machine + old machine trade-in | $93,000 |

Analysis:

Dorsett: This offer provides the most significant benefit to Holyfield with a net cost of $70,000.

Winston: This offer lacks commercial substance and doesn't offer any financial incentive compared to keeping the old machine.

Liston: This offer requires Holyfield to pay $3,000 in addition to their old machine, making it less attractive than Dorsett's offer.

Buying New Machine: This option has the highest cost and should be considered only if the new machine provides additional benefits or meets specific needs not met by the exchange offers.

Recommendation: Based on the information provided, Holyfield should accept the offer from Dorsett Company as it offers the most favorable net cost and commercial substance.