Question

E10.18B (L0 3) (Nonmonetary Exchange) Ward Company purchased an electric press on June 30, 2020, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase:

                                                       List price of new press                                                                       $24,800

                                                      Cash paid                                                                                            12,000

                                                        Cost of old press (10-year life, $1,000 residual value)                            35,000

                                                         Accumulated depreciation—old press (straight-line)                             27,200

                                                        Second-hand market value of old press                                                  6,600

Instructions

Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Ward’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2019.

Answer 1

Answer:-

(a)Journal entries when the exchange has commercial substance:-

			(Amount in $)
Date	Particulars	Debit	Credit
30-06-2020	New press A/C Dr	19400
	Accumulated depreciation(on old press) A/C Dr	27200
	To loss on exchange A/C	1200
	To Old equipment A/C		35000
	To Cash A/C(payment due)		12800
	(Being new electric press purchased in exchange of old press and cash and loss recognized)
31-12-2020	Depreciation A/C Dr	970
	To New press A/C		970
	(Being new press depreciated for 6months @10% p.a i,e.19400*6/12=$970)

working note:-

Cost of new equipment to be recognized	(Amount in $)
List pric of new press	24800
less:cash paid	12000
Cash payment due	12800
Add:fair value of old press	6600
Cost of new press to be recognized	19400

(b)Journal entries when the exchange has no commercial substance:-

			(Amount in $)
Date	Particulars	Debit	Credit
30-06-2020	New press A/C Dr	19800
	Accumulated depreciation(on old press) A/C Dr	27200
	To Old equipment A/C		35000
	To Cash A/C(payment due)		12000
	(Being new electric press purchased in exchange of old press and cash and loss recognized)
31-12-2020	Depreciation A/C Dr	990
	To New press A/C		990
	(Being new press depreciated for 6months @10% p.a i,e.19800*6/12=$990)

working note:

Cost of new equipment to be recognized	(Amount in $)
Original cost of old press	35000
less:Accumulated depreciation	27200
Book value of old press	7800
Add:Cash paid	12000
Cost of new press to be recognized	19800