Question

Splish Company exchanged equipment used in its manufacturing operations plus $4,320 in cash for similar equipment used in the operations of Blossom Company. The following information pertains to the exchange. Splish Co. - Blossom Co. Equipment (cost) - $40,320 - $40,320 Accumulated depreciation - 27,360 - 14,400 Fair value of equipment - 18,000 - 22,320 Cash given up - 4,320a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

Answer 1

A) without commercial substance

Splish Company

Dr Equipment new 17,280 (book value of old equipment + cash)

Cr Equipment old 12,960

Cr Cash 4,320

Blossom Company

Dr Equipment new 21,600 (book value of old equipment - cash)

Dr Cash 4,320

Cr Equipment old 25,920

Since the boot value is less than 25% of the carrying value of the asset, no gain or loss must be recognized. When you are preparing the journal entries, you must record the carrying value of the asset +/- any boot value given or taken included in the exchange.

B) with commercial substance

Splish Company

Dr Equipment new 22,320 (FMV)

Dr Accumulated depreciation - equipment old 27,360

Cr Equipment old 40,320

Cr Cash 4,320

Cr Gain on exchange 5,040

Blossom Company

Dr Equipment new 18,000 (FMV)

Dr Accumulated depreciation - equipment old 14,400

Dr Cash 4,320

Dr Loss on exchange 3,600

Cr Equipment old 40,320