Question

Two independent companies, Denver and Bristol, each own a warehouse, and they agree to an exchange in which no cash changes hands. The following information for the two warehouses is available:Denver BristolCost $90,000 $45,000Accumulated depreciation 55,000 25,000Fair value 30,000 30,000Required:1. Assuming the exchange has commercial substance, prepare journal entries for both Denver and Bristol to record the exchange.2. Assuming the exchange does not have commercial substance, prepare journal entries for both Denver and Bristol to record the exchange.

Answer 1

1. In the books of Denver

Dr Accumulated depreciation 55000

Dr Warehouse (new) 30000

Dr Loss on disposal 7000

Cr Warehouse (old) 90000

Cr Cash 2000

2. In the Books of Bristol:

Dr Cash 2000

Dr Warehouse (new) 28,000

Dr Accumulated depreciation 25000

Cr Loss on disposal 10000

Cr Warehouse (old) 45000

Step-by-step explanation:

1. Preparation of the journal entries for Denver

In the books of Denver

Dr Accumulated depreciation 55000

Dr Warehouse (new) 30000

($28000 + $2000)

Dr Loss on disposal 7000

(90,000+2,000-55,000-30,000)

Cr Warehouse (old) 90000

Cr Cash 2000

(Being To record the exchange of warehouse)

2. Prepare of the journal entries for Bristol

In the Books of Bristol:

Dr Cash 2000

Dr Warehouse (new) 28,000

($30000 - $2000)

Dr Accumulated depreciation 25000

Cr Loss on disposal 10000

(2000+28,000+25,000-45,000)

Cr Warehouse (old) 45000

(Being To record the exchange of warehouse)