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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 depreciation22,80012,000
Fair value of equipment15,00018,600
Cash given up3,600

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:

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How to Record Asset Acquisition, Disposal & Impairment in Accounting

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Chapter 11 / Lesson 2
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Accountants 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.


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