Question

Sweet Corporation exchanged equipment used in its manufacturing operations for equipment used in the operations of Pharoah Ltd. The following information pertains to the exchange:

		Sweet Corp.			Pharoah Ltd.
Equipment (cost)		$84,400			$84,400
Accumulated depreciation		46,100			41,000
Fair value of old equipment		42,500			43,000
Cash given up		500

Both companies agreed that the exchange did not have commercial substance.

Prepare the necessary journal entries to record the asset exchange on the books of both companies.

Answer 1

Firstly we need to calculate gain or loss on exchange of asset which is shown as follows:-

	Sweet Corp.	Pharoah Ltd.
Fair Value of Old Equipment	42,500	43,000
Book Value of Equipment:
(Cost - Accumulated depreciation) (84,400-46,100)	(38,300)
(84,400-41,000)		(43,400)
Gain or (Loss) on Exchange	4,200	(400)

The necessary entries to record the asset exchange if the exchange did not have commercial substance is shown as follows:-

In the books of Sweet Corp.

As the exchange lacks commercial substance, the new equipment would be debited with sum of book value and cash paid. Gain on exchange will not be recognized as no cash is received on exchange.

Journal Entries (Amounts in $)

Account Titles and Explanations	Debit	Credit
Equipment (New) (38,300+500)	38,800
Accumulated Depreciation	46,100
Equipment (Old)		84,400
Cash		500
(To record the exchange of equipment)

In the books of Pharoah Ltd.

Journal Entries (Amounts in $)

Account Titles and Explanations	Debit	Credit
Equipment (New)	42,500
Accumulated Depreciation	41,000
Cash	500
Loss on Exchange	400
Equipment (Old)		84,400
(To record the exchange of equipment)