Question

Crane Company Inc. gave a piece of equipment to Sarasota Inc. in exchange for a new machine and $5,000. The exchange lacks commercial substance.

Equipment:

Historical Cost = $70,000

Accumulated Depreciation = $40,000

Fair Market Value = $35,000

Machine:

Historical Cost = $50,000

Accumulated Depreciation = $35,000

Fair Market Value = $40,000

Instructions:

(1.) Prepare Crane Company Inc.'s journal entry to record exchange transaction.

(2.) Prepare Sarasota Inc.'s journal entry to record exchange transaction.

Answer 1

• Requirement 1

LACKS Commercial Substance
Accounts title	Debit	Credit	Working
Crane Company
Machine (new)	$40,000		[Fair value of Equipment received]
Accumulated Depreciation - Equipment	$40,000		[Of Old Equipment]
Cash	$5,000		[Cash received]
Gain on exchange		$15,000	[Balancing amount]
Equipment		$70,000	[Cost of old Equipment]

• Requirement 2

LACKS Commercial Substance
Accounts title	Debit	Credit	Working
Sarasota Inc
Equipment	$20,000		[Balancing amount]
Accumulated Depreciation – Machine	$35,000		[Of Old asset]
Machine		$50,000	[Cost of old asset]
Cash		$5,000	[Cash paid]