Question

Problem 4. Ford Inc. exchanged land and $7,500 cash for material handling equipment. The land had a book value of $75,000 and a fair value of $105,000. Required: 1. Prepare the journal entry to record the exchange. Assume the exchange has commercial substance. 2. Prepare the journal entry to record the exchange. Assume the exchange lacks commercial substance. Problem 4. Ford Inc. exchanged land and $7,500 cash for material handling equipment. The land had a book value of $75,000 and a fair value of $105,000. Required:

1. Prepare the journal entry to record the exchange. Assume the exchange has commercial substance.

2. Prepare the journal entry to record the exchange. Assume the exchange lacks commercial substance.

Answer 1

Credits Debit $ 112,500 Assuming the exchange has commercial substance :- Journal Entry - Date Accounts Title & Explanation XX-XX-XXxx Equipment To Cash To Land To Gain on exchange of assets (Entry for recording exchange of assets and cash) 7,500 75,000 30,000 Gain on exchange - fair value of asset received - book value of the asset given up Gain on exchange = (105000-75000) Gain on exchange = 30,000/. Assuming the exchange has lack commercial substance :- If the exchange has no commercial substance, no gain or loss will be recorded. Book value accounting is done. Journal Entry: Date Accounts Title & Explanation Debit Credits Equipment (7500+75000) 82,500 To Cash 7,500 To Land 75,000 (Entry for recording exchange of assets and cash)