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Journal entries for exchanges with and without commercial substance
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. |
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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. |
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 Originally Posted by morgaine300
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Originally Posted by Casual observer
https://www.askmehelpdesk.com/math-s...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. |
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- 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. |
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