During your audit examination of the Shirley Company”s Plant, Property, and Equipment accounts, the following transaction came to your attention. On 2009 January 2, machine A was exchanged for machine B. Shirley Company acquired machine A for USD 90,000 on 2007 January 2. Machine A had an estimated useful life of four years and no salvage value, and the machine was depreciated on the straight-line basis. Machine B had a cash price of USD 108,000. In addition to machine A, cash of USD 30,000 was given up in the exchange. Machine B has an estimated useful life of five years and no salvage value, and the machine is being depreciated using the straight-line method. The exchange has no commercial substance. Upon further analysis, you discover that the company recorded the transaction as an exchange of nonmonetary assets having commercial substance instead of one not having commercial substance. You must now determine the following:
a. What journal entry did the Shirley Company make when it recorded the exchange of machines? (Show computations.)
b. What journal entry should the Shirley Company have made to record the exchange of machines?
c. Assume the error was discovered on 2010 December 31, before adjusting journal entries have been made. What journal entries should be made to correct the accounting records? (Adjustments of prior years” net income because of errors should be debited or credited to Retained Earnings.) What adjusting journal entry should be made to record depreciation for 2010? (Ignore income taxes.)
d. What effect did the error have on reported net income for 2009? (Ignore income taxes.)
e. How should machine B be reported on the 2010 December 31, balance sheet?