Question

PRINTER VERSION HACK NEXT Exercise 10-19 (Part Level Submission) 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. Equipmenticost) Accumulated depreciation Fair value of equipment Cash given up Stellar Co. $35,280 23,940 15.750 3.750 Pearl Co. $35,280 12,600 19.530 Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts.) Debit Credit Account Titles and Explanation Stellar Company

Answer 1

Working Note :

Calculation of Gain or (Loss) on Exchange .

	Stellar Co.	Pearl Co.
Fair value of old equipment	$15,750	$19,530
Less : Book value of equipment	$11,340 (35,280 - 23,940)	$22,680 (35,280 - 12,600)
Gain or (Loss) on Exchange	$4,410	($3,150)

When the exchange lacks commercial substance , the gain on exchange is not recorded but loss on exchange is recorded in any case.

Answer a.

Account Titles and Explanation	Debit	Credit
Stellar company :
Equipment - New (Book Value of old + Cash Paid) ($11,340 + $3,780)	15,120
Accumulated depreciation	23,940
Equipment - old		35,280
Cash		3,780
(To record exchange of equipment when the exchange lacks commercial substance)
Pearl company :
Equipment - New	15,750
Accumulated depreciation	12,600
Cash	3,780
Loss on exchange (Ref. working note)	3,150
Equipment - old		35,280
(To record exchange of equipment when the exchange lacks commercial substance)