Goal: To practice recording an exchange of PPE and to determine the effects of the exchange on the financial statements. (See Topic Guides A 19, 35, 36). Information: On December 15th, Terry's management decided to trade in one of their machines for a newer model. After long discussions with their auditors, Terry's management has decided that the change in capacity between the old and new machines is so small that this exchange is with substance. The old machine originally cost $346,000 and had been fully depreciated to its $80,000 salvage value. The new machine typically sells for $1,250,000, but the vendor offered Terry a $115,000 trade-in on the old machine if the balance is paid in cash. Terry's management was excited about the deal, since they would have been able to sell the old machine for only $90,000 if they had tried to dispose of it on the open market. Although the deal was completed on December 29", no journal entries have yet been recorded. Terry's management would like to know the effect of the exchange on the following ratios: 1"To understand why we use A/P for the plug figure, we have to go back to what the journal entry would look like for a purchase. We would debit inventory (since this is a perpetual inventory firm) and credit A/P. Mis-recording the inventory effects of sales would cause errors in our inventory and COGS accounts. Mis-recording the inventory effects of purchases would cause errors in our inventory and A/P accounts. So, in order to correct for all of Terry's mistakes, we need to adjust inventory, COGS, and A/P. 25