Question

Red Company and Green, Inc., are candy manufacturers. The two companies agree to exchange pieces of equipment, with Red Company exchanging its equipment plus $30,000 for Green, Inc.'s equipment. The transaction lacks commercial substance. On the date of the exchange, the companies' records showed the following information:

Red Company Green, Inc. Historical cost $280,000 $300,000 Accumulated depreciation (150,000) (160,000) Fair value 250,000 275,000

To prepare each required journal entry:

Click on a cell in the Account Name column and select from the option list the appropriate account.

An account may be used once, more than once, or not at all.

Enter the corresponding debit or credit amount in the associated column.

Round all amounts to the nearest whole number. Not all rows in the table might be needed to complete each journal entry. If no journal entry is needed, check the “No entry required” box at the top of the table as your response.

1. Prepare the journal entries Red Company must record to account for the exchange of equipment.

2. Prepare the journal entries Green, Inc., must record to account for the exchange of equipment.

Answer 1

From the information provided, a table can be drawn as under:

Particulars	Red Company	Green, Inc
Historical cost	$          280,000	$               300,000
Accumulated depreciation	$          150,000	$               160,000
Book Value	$          130,000	$               140,000
Fair value	$          250,000	$               275,000

Book value = Historical Cost - Accumulated depreciation

Whenever there is an exchange of assets between two parties, every party records the transaction in his books of accounts on the fair value of incoming assets i.e. the fair value of the asset it is going to receive.

Here the accounting transaction will be booked on the basis of fair value of the asset which is being received by the Company in exchange transaction.

1. Journal entries Red Company must record to account for the exchange of equipment

Date	Account titles and explanation	Debit	Credit
	Red Company
	New Equipment A/c Dr	$ 275,000
	Accumulated Depreciation A/c	$ 150,000
	To Cash A/c		$      30,000
	To Profit on exchange of asset		$   115,000
	To Old Equipment A/c		$   280,000
	(being new equipment acquired in exchange of old equipment and cash paid $ 30,000)

2. Journal entries Green, Inc., must record to account for the exchange of equipment

Date	Account titles and explanation	Debit	Credit
	Green Inc.
	New Equipment A/c Dr	$ 250,000
	Accumulated Depreciation A/c	$ 160,000
	Cash A/c	$    30,000
	To Profit on exchange of asset		$   140,000
	To Old Equipment A/c		$   300,000
	(being new equipment acquired in exchange of old equipment and cash received $ 30,000)

Explanation:

In the books of Red Company new equipment will be recorded at the fair value of Green Inc's equipment because this is what Red Company is receiving. Also Red Company is paying $30,000 to Green Inc in addition to equipment. Green Inc will record new equipment in his books of accounts at the fair value of Red Company's equipment because this is what Green Inc is receiving. Also Green Inc is receiving $30,000 from Red Company. Old equipment will be recorded at its on cost in every Company's books of accounts. Accumulated depreciation will be debited of the equipment which is being given away in exchange transaction. Balancing profit / loss can be calculated and is to be recorded. For Red Company book value of old equipment is $ 130,000 (book value calculated and shown in table drawn above). Red Company received assets worth fair value of $ 275,000 & paid cash $30,000. Total of incoming assets for Red Company comes to $275,000 while book value of given away asset is $130,000 and cash paid $ 30,000 hence profit for Red Company in this transaction is $115,000 ($(130,000+ 30,000)- $ 275,000) . Likewise profit / loss calculated for Green Inc.