A company has two divisions: a merchandising division and a construction dividion. The merchandising division purchases and sells construction equipment. The construction division builds shopping centres.
The company entered into two nonmonetary transactions during the year ended December 31, 20×5:
a. Exchanged construction equipment held in inventory at a cost of $25,000 in exchange for plumbing services on one of the construction contracts. The plumbing services were contracted to cost $43,000. The equipment would normally sell for $46,000. The bookkeeper wrote the following journal entry to record this transaction:
|Cost of goods sold – construction division||DR.25,000|
b. During 20×4, the company purchased Land 2 at a cost of $2,500,000. On July 2, 20×5, it exchanged 20% (the land was subdivided) of Land 2 for equipment that is to be used in the course of business (i.e. not inventory). The fair value of the land was $600,000 and the fair value of the equipment was $620,000. The bookkeeper was unsure of how to account for this transaction and did not write a journal entry. The company’s policy is to depreciate equipment using the diminishing balance method at the rate of 15% per year.
Required – For each of the transactions above, prepare the adjusting journal entry/entries required at December 31, 20×5.