Paul Jenkins is the sole owner of Friendly Exchange Shop. Friendly Exchange Shop buys and sells jewellery, musical instruments, televisions, telephones and small kitchen appliances. Paul has owned the shop for almost one year, and the shop has developed a reputation as an honest, reliable place for families to buy or sell their used items.

Up until now, Friendly Exchange Shop has bought and sold goods only from retail customers. Paul believes that Friendly Exchange Shop is overstocked with jewellery, and he thinks the shop does not have enough musical instruments to meet the demand that will occur after the new school year starts. Paul believes that the shop needs to sell some jewellery, which cost about \(\$ 1500\), and replace it with several trumpets, trombones and flutes.

Friendly Exchange Shop advertises in the newspaper when it wants to buy particular types of used items. This way Paul has the opportunity to inspect the goods before they are purchased, and he has the opportunity to discuss the history of each item with its current owner. In the present situation, however, Paul is considering making a merchandise trade with a wholesale exchange broker. Although Paul is almost convinced that the trade will be the best way for his business to obtain the musical instruments, he has two major concerns.

First, Paul is concerned about maintaining the shop's reputation for reliable merchandise. He knows almost all of his customers and he has earned their trust. Because Paul does not know where the wholesaler's musical instruments were purchased, he worries that he will be trading good jewellery for inferior-quality musical instruments. He would not find out that the instruments are inferior until the customers told him of their dissatisfaction. Second, Paul does not know how to record the trade in Friendly Exchange Shop's accounting records. He knows that the jewellery he plans to trade cost \(\$ 1500\) and that he was going to try to sell the jewellery for \(\$ 4000\). Paul does not know how much the wholesaler paid for the musical instruments or what price to charge his customers for each item.

Required:

a Using the four-step approach you learned earlier in this book, discuss how you think Paul should solve this business problem.

b Assuming Friendly Exchange Shop trades the jewellery for the musical instruments owned by the wholesaler, discuss how you think this transaction should be recorded in the accounting records. Be sure to include references to the accounting concepts introduced in this chapter.