Question

Novak Company exchanged equipment used in its manufacturing operations plus $3,120 in cash for similar equipment used in the operations of Splish Company. The following information pertains to the exchange.

Novak Co.

Splish Co.

Equipment (cost)

$29,120$29,120

Accumulated depreciation

19,76010,400

Fair value of equipment

13,00016,120

Cash given up

3,120

Part 1

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 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Novak Company:

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

Splish Company:

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

eTextbook and Media

List of Accounts

Part 2

Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has 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 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Novak Company

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

Splish Company

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

Answer 1

Answer
Calculation of Gain or Loss
	Novak	Splish
Fair Value of Old Equipment	$             13,000	$       16,120
Less: Book Value of Equipment	$              -9,360	$     -18,720
Gain (or Loss) on Exchange	$               3,640	$       -2,600

(a) Lacks Commercial Substance
Company	Account Title and Explanation	Debit	Credit
Novak Company:	Equipment ($9360 + $3120)	12480
	Accumulated Depreciation	19760
	Equipment		29120
	Cash		3120
	(Being equipment exchanged)
Splish Co	Equipment (New)	13000
	Accumulated Depreciation	10400
	Cash	3120
	Loss on exchange	2600
	Equipment(Old)		29120
	(Being equipment exchanged)

(b) Has Commercial Substance
Company	Account Title and Explanation	Debit	Credit
Novak Company:	Equipment (New) ($13,000 + $3,120)	16120
	Accumulated Depreciation	19760
	Equipment (Old)		29120
	Cash		3120
	Gain on exchange		3640
	(Being equipment exchanged)
Splish Co	Equipment (New)	13000
	Accumulated Depreciation	10400
	Cash	3120
	Loss on exchange	2600
	Equipment(Old)		29120
	(Being equipment exchanged)