Frosty Ltd. exchanged 400 common shares of Grants Corp., which Frosty was holding as an investment, for new equipment from Milliken Sales. The Grants Corp. common shares, which had been purchased by Frosty for $ 80 per share, had a quoted market value of $ 100 per share at the date of exchange. The equipment had a recorded amount on Milliken's books of $ 37,000, but the fair value was not available. The journal entry that Frosty should make to record this exchange is

Question

Quizplus · Accepted Answer

The correct journal entry to record the exchange involves recognizing the equipment at the fair value of the shares given up ($100 per share times 400 shares = $40,000). The investment in Grants Corp. common shares (not Lesotho Corp as mentioned in the options) had a cost of $32,000 ($80 per share times 400 shares), resulting in a gain of $8,000 ($40,000 - $32,000).