Paul Jenkins is the sole owner of Friendly Pawn Shop. Friendly Pawn Shop buys and sells jewelry, musical instruments, televisions, telephones, and small kitchen appliances. Paul has owned the pawn 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 Pawn Shop has bought and sold goods only from retail customers. Paul believes that Friendly Pawn Shop is overstocked with jewelry, 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 pawn shop needs to sell some jewelry, which cost about $1,500, and replace it with several trumpets, trombones, and flutes.

Friendly Pawn 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 pawnbroker. Although Paul is almost convinced that the trade will be the best way for his company to obtain the musical instruments, he has two major concerns.

First, Paul is concerned about maintaining Friendly Pawn 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 jewelry 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 Pawn Shop’s accounting records. He knows that the jewelry he plans to trade cost $1,500 and that he was going to try to sell the jewelry for $4,000. Paul does not know how much the wholesaler paid for the musical instruments or what price to charge his customers for each item.

Required: (1) Using the four-step approach you learned earlier in this book, discuss how you think Paul should solve this business problem.

(2) Assuming Friendly Pawn Shop trades the jewelry for the musical instruments owned by the wholesale pawnbroker, 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.  lo7