Sheridan Company exchanged equipment used in its manufacturing operations plus $3,600 in cash for...
Question:
Sheridan Company exchanged equipment used in its manufacturing operations plus $3,600 in cash for similar equipment used in the operations of Skysong Company. The following information pertains to the exchange.
| Sheridan Co. | Skysong Co. | |
| Equipment (cost) | $33,600 | $33,600 |
| Accumulated depreciation | 22,800 | 12,000 |
| Fair value of equipment | 15,000 | 18,600 |
| Cash given up | 3,600 |
a. 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.
Accounting for an Asset Exchange:
A non-monetary asset exchange is a transaction where two parties swap assets with or without exchanging cash as well. The gain or loss on the exchange is only recognized when the transaction has commercial substance.
Answer and Explanation: 1
a. If the exchange lacks commercial substance, neither company will recognize a gain or loss, and the initial cost of the new asset would be the book value of the asset exchanges plus or minus the cash paid/received. The fair value of the equipment is irrelevant in this case.
| Company | Description | Debit | Credit |
|---|---|---|---|
| Sheridan | Equipment (new) ( = $33,600 - $22,800 + $3,600) | $14,400 | |
| Accumulated depreciation (old) | 22,800 | ||
| Equipment (old) | $33,600 | ||
| Cash | $3,600 | ||
| To record the exchange of equipment in a transaction that lacks commercial substance | |||
| Skysong | Equipment (new) ( = $33,600 - $12,000 - $3,600) | $18,000 | |
| Accumulated depreciation (old) | $12,000 | ||
| Cash | $3,600 | ||
| Equipment (old) | $33,600 | ||
| To record the exchange of equipment in a transaction that lacks commercial substance |
b. When the exchange has commercial substance, we record the new equipment at its fair value and recognize the related gain or loss. Note that the gain/loss is the difference between the book value of the asset and fair value of the asset exchanges, and it would not be the same amount for the two companies:
| Company | Description | Debit | Credit |
|---|---|---|---|
| Sheridan | Equipment (new) | $18,600 | |
| Accumulated depreciation (old) | 22,800 | ||
| Equipment (old) | $33,600 | ||
| Cash | $3,600 | ||
| Gain on sale of asset | $4,200 | ||
| To record the exchange of equipment in a transaction that has commercial substance | |||
| Skysong | Equipment (new) | $15,000 | |
| Accumulated depreciation (old) | $12,000 | ||
| Cash | $3,600 | ||
| Loss on sale of asset | $3,000 | ||
| Equipment (old) | $33,600 | ||
| To record the exchange of equipment in a transaction that has commercial substance |
Learn more about this topic:
from
Chapter 11 / Lesson 2Accountants must clearly record the acquisition, disposal, and impairment of a company's or individual's assets. Review these accounting concepts specific to assets, including acquisition, basket purchases, retirement, disposal, and impairment.