Question

Pronghorn company purchased an electric press on June 30, 2025, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase: prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Pronghorn's fiscal year ends on December 31 and depreciation has been recorded through December 31, 2024. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select 'No Entry' for the account titles and enter '0' for the amounts. List all debit entries before credit entries).

Answer 1

The journal entries for the exchange of an asset depend on whether the exchange has commercial substance. With commercial substance, the new asset is debited at fair value, while any gain or loss is recognized immediately. Without commercial substance, gains may be deferred.

Step-by-step explanation:

When a company trades in an old asset for a new one, the accounting treatment depends on whether the exchange has commercial substance or not. An exchange has commercial substance if the future cash flows of the asset are expected to change as a result of the transaction. If it lacks commercial substance, the cash flows are not expected to change significantly.

Journal Entry for Exchange with Commercial Substance

Debit the new asset at fair value, debit accumulated depreciation for the old asset, credit the old asset at its historical cost, and credit cash for the balance paid.

Journal Entry for Exchange Lacking Commercial Substance

Similar to the commercial substance case, any gain from the trade-in may not be recognized immediately and should be deferred if cash is not received.