Question

Stellar Company exchanged equipment used in its manufacturing operations plus $3,780 in cash for similar equipment used in the operations of Pearl Company. The following information pertains to the exchange. Equipment (cost) Accumulated depreciation Fair value of equipment Cash given up Stellar Co. $35,280 23,940 15,750 3.780 Pearl Co. $35,200 12,600 19,530 (b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance. (Credit account titles automatically indented when amount is entered. Do not indent manually is required, select "No Entry for the account titles and entera the amounts.) Debit Credit Account Titles and Explanation Stellar Company

Answer 1

Requirement a: Prepare journal entries to record the exchange , assuming that the company lacks commercial substance as follows: C Credit A B 1 Account title and explanation Debit 2 Stellar company 3 Equipment (Balancing amount) $15.120 4 Accumulated depreciation Equipment | $23,940 5 Equipment 6 Cash $35.280 $3.780 Credit 8 Account title and explanation Debit 9 Pearl company 10 Equipment | $15.750 11 Accumulated depreciation Equipment | $12,600 12 Cash $3.780 13 Loss on disposal of eqipment $3,150 14 Equipment $35,280 Requirement b: Prepare journal entries to record the exchange, assuming that the company has commercial substance as follows:

C Credit B 1 Account title and explanation Debit 2 Stellar company 3 Equipment (15750+3780) $19,530 4 Accumulated depreciation Equipment $23,940 5 Equipment 6 Cash 7 Gain on disposal of equipment $35,280 $3,780 $4.410 8 Credit 9 Account title and explanation Debit 10 Pearl company 11 Equipment $15.750 12 Accumulated depreciation Equipment $12,600 13 Cash $3,780 14 Loss on disposal of eqipment $3,150 15 Equipment $35,280 Working note: Calculate gain, loss on disposal as follows: Particulars Fair value of equipment (1) Equipment (cost) (2) Accumulated depreciation (3) Difference (4) (4 = 2 - 3) Gain/Loss (1-4) Stellar co. Pearl co. $15,750 $19,530 $35,280 $35,280 $23.940 $12.600 $11,340 $22.680 S4,410 -S3.150