Question

Beeman Company exchanged machinery with a fair value of $4,680,000, a recorded cost of $7,200,000 and accumulated depreciation of $3,600,000 with Lacey Corporation for machinery Lacey owns.

The machinery that Lacey owns has a fair value of $4,520,000, a recorded cost of $8,640,000, and accumulated depreciation of $4,752,000. Lacey also gave Beeman $160,000 of cash in the exchange. Assume depreciation has already been updated.
Instructions
(a) Prepare the entries on both companies' books assuming that the exchange had commercial substance.
(b) Prepare the entries on both companies' books assuming that the exchange lacked commercial substance

Answer 1

See below

Step-by-step explanation:

A. Commercial substance

Beeman company

Machinery ...............................Dr

$4,520,000

Accumulated depreciation......Dr $3,600,000

Cash.......Dr $160,000

To Gain on disposal of plant assets ..........Cr $1,080,000

To equipment ............Cr $7,200,000

Lacey Company

Equipment ............Dr $4,680,000

Accumulated depreciation ........Dr $4,752,000

To Gain on disposal of equipment ..............Cr $632,000

To equipment ...........Cr $8,640,000

To cash ................Cr $160,000

B. Lacked commercial substance

Berman company

Equipment ............Dr $3,476,923

Accumulated depreciation .........Dr $3,600,000

Cash ........Dr $160,000

To gain on disposal of equipment ..............Cr $36,923

To equipment ..............Cr $7,200,000

Working

= ($160,000 / ($160,000 + $4,520,000) × $1,080,000

= $36,923

Lacey corporation

Equipment ..............Dr $4,048,000

Accumulated depreciation...........Dr $4,752,000

To equipment .................Cr $8,640,000

To cash ..................................... Cr $160,000

Commercial substance

Lacey company

Cost............ Dr $8,640,000

Accumulated depreciation...........Dr $4,752,000

Book value............... Dr $3,888,000

Fair value.......... Dr $4,520,000

Gain on disposal .................Dr $632,000