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Headland Industries purchased the following assets and constructed a building as well. All this was done during the current y
Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concernin
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In the books oh Headland Industries
General Journal
Date Description Debit Credit
Machinery $            65,000
Equipment $            65,000
Cash $         1,30,000
(being assets 1 & 2 acquired for cash)
Machinery $            52,000
Cash $            13,000
Note Payable $            39,000
(being asset 3 acquired)
Machinery $            68,250
Cash $            13,000
Old machinery (book value) $            78,000
Gain on exchange $              3,250
(being asset 4 acquired)
Equipment (100 shares @ $ 14) $              1,400
Common Stock (100 shares of $10) $              1,000
Additional paid in capital $                  400
(being asset 5 purchased)
Building $       13,78,000
Cash $       13,78,000
(being building constructed)
Working for Asset 4
Calculation of gain
Gain = fair value of old asset- cost value of old asset
           = 104000-78000
            =26000
Percentage of gain = Cash received/ fair value of old asset
   =13000/104000
=12.5%
Since gain is less than 25% and exchange lacks commercial substance then gain is recognised on proportional basis
Proportionate gain = Total gain * percentage of gain
     =26000*12.5%
=3250
Cost of new machinery acquired = book value of old asset+ gain- cash received
68250
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