Question

Equipment that cost $390,300 and has accumulated depreciation of $313,600 is exchanged for equipment with a fair value of $160,000 and $40,000 cash is received. The exchange lacked commercial substance. Calculate the gain to be recognized from the exchange. Gain recognized SHOW LIST OF ACCOUNTS the entry for the exchange. Show a check of the amount recorded for the new equipment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Account Titles and Explanation Accumulated Depreciation-Equipment Equipment Cash Debit Credit 313,600 40,000 Equipment 390,300 Gain on Disposal of Equipment

Answer 1

A	B	C	D	E	F	G	H	I	J	K
2
3		An exchange have commercial substance if the exchange affects the future cash flows of an entity.
4		If the exchange don't have any impact on future cash flows of the firm, then the exchange lack the commercial substance.
5
6		If cash is received in an exchange that has no commercial substance, then part of
7		gain is realized, if the cash is less than 25% of the consideration received.
8		However, if the cash is more than the 25% of total assets received, then exchange is assumed to be cash sale,
9		and the difference between the fair value and carrying value is treated as gain.
10
11		Cost of old asset	$390,300
12		Accumulated depreciation of old asset	$313,600
13		Carrying value of old asset	$76,700	=D11-D12
14
15		Fair value of New Equipment	$160,000
16		Cash Received	$40,000
17		Total Assets Received	$200,000	=D15+D16
18
19		% of Cash of Total assets received	20.00%	=D16/D17
20
21		Since cash received is less than 25% of the total assets received, therefore 20% of the gain will be realized.
22
23		Total Gain	=Total Asset Received - Carrying value of old asset
24			$123,300	=D17-D13
25
26		Gain Recognized	=Total gain*% of cash of total asset received
27			$24,660.00	=D24*D19
28
29		Hence Gain Recognized is	$24,660.00
30
31		Journal entry for exchange will be as follows:
32		Account	Debit	Credit
33		Accumulated Depreciation	$313,600
34		Equipment	$61,360		=E36+E37-D33-D35
35		Cash	$40,000
36		Equipment		$390,300
37		Gain on Disposal of Equipment		$24,660
38