Question

On September 3, 2018, the Robers Company exchanged equipment with Phifer Corporation. The facts of the exchange are as follows:

To equalize the exchange, Phifer paid Robers $5,000 in cash.

Required:

Record the exchange for both Robers and Phifer. The exchange has commercial substance for both companies.

Answer 1

Nonmonetary Exchange

Nonmonetary exchange involves acquire asset for exchange of an asset other than cash. Here, assets are acquired in exchange of old assets. Cash is provided to equalize the asset’s fair value.

Prepare journal entry to record the exchange on the books of R Company.

Explanation:

• Cash is an asset account and increased. Therefore, debit Cash account with $5,000.

• New equipment increases the asset account. Hence, debit New Equipment account with $70,000.

• Accumulated depreciation – old asset is a contra asset. It increases the value of asset account. Therefore, debit Accumulated Depreciation with $55,000.

• Old Equipment is an asset account and decreased. Therefore, credit Old Equipment account with $120,000.

• Gain on sale of exchange of assets increases the equity by $10,000. Hence, credit Gain on sale of exchange of assets with $10,000.

Working note

1. Determine the value of new equipment.

2. Determine the gain on exchange of assets.

Prepare journal entry to record the exchange on the books of P Company.

Explanation:

• New equipment increases the asset account. Hence, debit New Equipment account with $75,000.

• Accumulated depreciation – old asset is a contra asset. It increases the value of asset account. Therefore, debit Accumulated Depreciation with $63,000.

• Loss on sale of exchange of assets decreases the equity by $7,000. Hence, debit Loss on sale of exchange of assets with $7,000.

• Cash is an asset account and decreased. Therefore, credit Cash account with $5,000.

• Old Equipment is an asset account and decreased. Therefore, credit Old Equipment account with $140,000.

Working note

1. Determine the value of new equipment.

2. Determine the gain on exchange of assets.