Cowher Co. Hinson Co.
Equipment(cost) $450,000 $825,000
Accumulated depreciation 145,000 450,000
Fair market value of equipment 350,000 350,000

1. Cowher Co. and Hinson Co. traded the above equipment.The exchange has commercial substance.Make entries on the books of both companies.

2. Cowher Co. and Hinson Co. traded the above equipment.The exchange lacks commercial substance.Make entries on the books of both companies.

3supermom

Cowher Co......Hinson Co.
Equipment Cost 450,000.........825,000
Accum. Depr.......145,000.........450,000
Fair Mkt. Value....350,000.........350,000

...............................Cowher Co....Hinson Co.
Fair Value Equip Rec'd ..350,000...350,000
Less: Book Value of Equip
(450,000 - 145,000).....(305,000)
(825,000 - 450,000)...................(375,000)
Gain or loss................45,000 gain..(25,000) loss

Journal Entries
Cowher:
Equipment........350,000
Accum Depr.....145,000
........Equipment.................450,000
........Gain on Exchange.......45,000

Hinson:
Equipment.......350,000
Accum Depr....450,000
.......Equipment..................825,000
.......Loss..........25,000

For the part about lacking commercial substance, I am still working on this one myself. The basis will be reduced because the gain is not recognized since no cash was exchanged.

morgaine300

Please do not just give answers away to people's homework! Not only are you doing their homework for them, but people don't always learn much when they just see answers and have no clue how you got there.

Casual observer

Aren't you jumping to conclusions? Maybe the questioner only wants to make sure he is on the right track. Why do you think you should decide what should and should not be posted? How about letting a free exchange of information exist? Good grief!

morgaine300

Because we have a guideline right here stating so:

http://www.askmehelpdesk.com/math-sc...board-b-u.html

Since you seem not to know the rules yourself, I'm not sure how you're in a position to judge what I'm doing.

I wasn't jumping to any conclusions. I'm very well aware the person my have wanted to know if they're on the right track, but if that's what they want, they need to post their work for us to look at, correct, comment on, etc., not just post the homework problem. We can't know what they want if they don't say so, so in the meantime it's inappropriate just to post the answers. For all you know, it's a test question and someone just gave them the answer. Leaving that possibility open is not "jumping to conclusions." It means we don't know.

We are not here to just answer people's homework for them. And I've been teaching for 13 years -- I think I know a little bit about the matter.

hamzashakaa

- If the exchange lacks commercial substance Cowher should record the following entry:

Dr. Equipment (New) 305,000
Dr. Accumulated Depreciation(Old Eq.) 145,000
Cr. Equipment (Old) 450,000


Actually there is a theoretical gain in this transaction amounting to 45,000 (FV 350,000 - book value of the assets given up 305,000) but because the transaction lacks commercial substance no gain should be recorded in the transaction and the new asset should be recorded at the book value of the asset given up.


- Hinson should record the following entry:

Dr. Equipment (New) 350,000
Dr. Accumulated Depreciation(Old Eq.) 450,000
Dr. Loss on exchange of assets 25,000
Cr. Equipment (Old) 825,000


For Hinson this transaction resulted in a loss by an amount of 25,000 (FV of the asset received 350,000 - book value of the asset given up 375,000)
If the exchange lacks commercial substance and there is a loss identified the new asset should be recorded at the fair value of the asset received or given, whichever is more evident.