Question

Omega Corp. has entered into a transaction with Lively Inc. Omega Corp will give its equipment to Lively Inc. in exchange for Lively's equipment. Omega Corp will also pay Lively Inc. $30,000 cash. Omega Corp's equipment originally cost $250,000 when it was purchased 2 years ago and currently has $80,000 of accumulated depreciation and an estimated fair value of $230,000. Lively's equipment has a cost of $212,000 and accumulated depreciation of $35,000. The fair value of Lively Inc's equipment is determined to be $260,000. Required: A. Prepare the journal entry for Omega Corp assuming the exchange has commercial substance. B. Prepare the journal entry for Omega Corp assuming the exchange lacks commercial substance.

Answer 1

Omega Corporation Lively Inc. $ 2,12,000 2,50,000 Description Original Cost Accumulated Depreciation Net Book Value 80,000 $ 1,70,000 $ 35,000 1,77,000 $ Fair market value $ 2,30,000 $ 2,60,000 Cash - 2,30,000 $ $ 30,000 2,30,000 1. Date Credit $ $ Debit 80,000 2,60,000 Accounts Name Accumulated Depreciation (Omego) Equipment (Lively) Cash Equipment (Omego) Gain on exchange of equipment [Since, exchange has commercial substance, the new equipment aquired will be recorded at fair market value. Gain or loss is balancing figure.] $ $ $ 30,000 2,50,000 60,000 2. Date Credit $ $ Debit 80,000 2,07,000 Accounts Name Accumulated Depreciation (Omego) Equipment (Lively) Cash Equipment (Omego) Gain on exchange of equipment [Since, exchange has no commercial substance, the new equipment aquired will be recorded at book value $177,000 + Cash consideration $30,000 = $207,000. Gain or loss is balancing figure.] $ $ $ 30,000 2,50,000 7,000