Question

You have two clients that are considering trading machinery with each other. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your clients would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:

		Client A			Client B
Original cost		$101,300			$149,100
Accumulated depreciation		36,100			76,600
Fair value		87,600			110,000
Cash received (paid)		(22,400	)		22,400

Record the trade-in on Client A’s books assuming the exchange lacks commercial substance. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit

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Record the entry on Client B’s books assuming the exchange lacks commercial substance. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

• Requirement asked

LACKS Commercial Substance
Accounts title	Debit	Credit	Working
Client A
Equipment (new)	$87,600		[Balancing amount]
Accumulated Depreciation	$36,100		[Of Old Equipment]
Equipment (Old)		$101,300	[Cost of old Equipment]
Cash		$22,400	[Cash paid]
Client B
Equipment (new)	$87,600		[Fair value of Equipment received]
Accumulated Depreciation	$76,600		[Of Old Equipment]
Cash	$22,400		[Cash received]
Gain on Exchange		$37,500	[Balancing amount]
Equipment (Old)		$149,100	[Cost of old Equipment]