On December 1, 2018, Soft Ente
On December 1, 2018, Soft Enterprise exchange equipment withHeavy Company. The information for both companies follows:
|
Soft Enterprise |
Heavy Company |
|
|
Original Cost |
$120,000 |
$140,000 |
|
Accumulated Depreciation |
55,000 |
63,000 |
|
Fair value |
75,000 |
70,000 |
|
Cash paid |
5,000 |
Instructions:
Fill the following table assuming the exchange has commercialsubstance for both companies.
|
Soft Enterprise |
Heavy Company |
|
|
Calculate the gain or loss on disposal recognized by eachcompany on the exchange. |
||
|
Calculate the cost of the equipment received by eachcompany. |
Prepare the required journal entry on December 1, 2018 for SoftEnterprise assuming the exchange has commercial substance for bothcompanies. Omit explanations.
|
Date |
Accounts Title and Explanation |
Ref. |
Debit |
Credit |
Fill the following table assuming the exchange lacks commercialsubstance for both companies.
|
Soft Enterprise |
Heavy Company |
|
|
Calculate the gain or loss on disposal recognized by eachcompany on the exchange. |
||
|
Calculate the cost of the equipment received by eachcompany. |
Prepare the required journal entry on December 1, 2018 for SoftEnterprise assuming the exchange lacks commercial substance forboth companies. Omit explanations.
|
Date |
Accounts Title and Explanation |
Ref. |
Debit |
Credit |
Answer:
Exchange has commercial substance:
| Soft Enterprise | Heavy Company | |
| Calculate the gain or (loss)on disposal recognized by each company on the exchange | 10000 | -7000 |
| Calculate the cost of theequipment received by each company | 70000 | 75000 |
New asset is recorded at fair value of old asset + cash paid orfair value of old asset – cash received.
Difference between fair value and book value of old asset is thegain on exchange.
Soft Enterprise:
| Date | Account Titles and Explanation | Debit | Credit |
| Dec. 1, 2018 | Cash | 5000 | |
| Accumulated depreciation | 55000 | ||
| Equipment (new) ($75000 – $5000) | 70000 | ||
| Equipment (old) | 120000 | ||
| Gain on disposal | 10000 |
Exchange lacks commercial substance:
| Soft Enterprise | Heavy Company | |
| Calculate the gain or (loss)on disposal recognized by each company on the exchange | 0 | 0 |
| Calculate the cost of theequipment received by each company | 60000 | 82000 |
New asset is recorded at book value of old asset + cash paid orbook value of old asset – cash received.
No gain or loss on exchange since recorded at book value.
Soft Enterprise:
| Date | Account Titles and Explanation | Debit | Credit |
| Dec. 1, 2018 | Cash | 5000 | |
| Accumulated depreciation | 55000 | ||
| Equipment (new) [($120000 – $55000) – $5000] | 60000 | ||
| Equipment (old) | 120000 |
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