Question

I think the second part of question C is meant to say What if it has commercial substance, how would it impact the financial statement?

Company A Company B Original Cost of Machinery Accumulated Depreciation Fair Value $150,000 80,000 120,000 $100.000 45,000 80,000 Company A is trading machinery with Company B. a) Prepare journal entries to record the exchange on the books of both companies. Assume the exchange lacks commercial substance. b) Prepare journal entries to record the exchange on the books of both companies. Assume the exchange has commercial substance. c) If the exchanged lacked commercial substance how would it impact the financial statement? What if it has commercial substance?

Answer 1

a) The Exchange lacks commercial substance
Therefore, Gains are not recorded on exchange
Company A
Accounts	Debit	Credit
Machinery (New)	70000
Accumulated Depreciation (Old)	80000
Machinery (Old)		150000
Company B
Accounts	Debit	Credit
Machinery (New)	55000
Accumulated Depreciation (Old)	45000
Machinery (Old)		100000
b) The Exchange has commercial substance
Therefore, Gains are recorded on exchange
Company A
Accounts	Debit	Credit
Machinery (New)	80000
Accumulated Depreciation (Old)	80000
Gain on Exchange		10000
Machinery (Old)		150000
Company B
Accounts	Debit	Credit
Machinery (New)	120000
Accumulated Depreciation (Old)	45000
Gain on Exchange		65000
Machinery (Old)		100000
c)
If exchange lacked commercial substance,
It would not impact the Financial Statement.
As no Gain will is recorded and net value of asset remains same.
If exchange has Commercial substance,
It will impact the Financial Statement.
Asset value will increase and Gain on exchange will be recorded in both the companies.