Question

You have two clients that are considering trading machinery with each other. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your clients would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:

Client A Client B
Original cost $104,700 $158,100
Accumulated depreciation 43,600 79,800
Fair value 88,400 115,700
Cash received (paid) 27,300 27,300
Record the trade-in on Client A's books assuming the exchange has commercial substance.
Record the trade-in on Client A's books assuming the exchange lacks commercial substance.

Answer 1

the exchange has commercial substance

New Machine at Fair Value $115,700 (debit)

Cash Received $27,300 (debit)

Accumulated Depreciation Asset Given Up $43,600 (debit)

Cost of Asset Given Up $104,700 (credit)

Profit from Exchange $81,900 (credit)

the exchange lacks commercial substance.

New Machine at Carrying Amount of Asset Given up $61,100 (debit)

Cash Received $27,300 (debit)

Accumulated Depreciation Asset Given Up $43,600 (debit)

Cost of Asset Given Up $104,700 (credit)

Profit from Exchange $27,300 (credit)

Step-by-step explanation:

the exchange has commercial substance

Cost price of Asset acquired is measured at Fair Value of Asset given up.

the exchange lacks commercial substance.

Cost price of Asset acquired is measured at Carrying Amount of Asset given up.