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Chapter 10: Q19E (page 539)

(Nonmonetary Exchange) Carlos Arruza Company exchanged equipment used in its manufacturing operations plus \(3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.

Carlos Arruza Co.

Tony LoBianco Co.

Equipment (cost)

\)28,000

$28,000

Accumulated depreciation

19,000

10,000

Fair value of equipment

12,500

15,500

Cash given up

3,000

Instructions

  1. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
  2. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

Short Answer

Expert verified

Carlos Arruza

Tony Lo Bianco

(a)

Accumulated depreciation

$19,000

$10,000

(b)

Equipment cost

$15,500

$12,500

Step by step solution

01

Meaning of Commercial Substance

When a business's future cash flow changes due to a business entity's transaction, a commercial substance exists in that transaction

02

(a) Preparing journal entries

Exchange lacks commercial substance.

Carlos Arruza Company:

Date

Particular

Debit ($)

Credit ($)

Equipment

12,000

Accumulated Depreciation-Equipment

19,000

Equipment

28,000

Cash

3,000

Working notes:

Calculating Valuation of equipment

Book value of equipment given up

$ 9,000

Add: Cash paid

3,000

New equipment

$12,000

Calculation of gain on disposal

The fair value of old equipment

$12,500

Less: Book value of old equipment

9,000

Gain on disposal

$ 3,500

Note: The gain is delayed since the cash paid is less than 25% of the entire amount given up, and the transaction is nonmonetary.

Tony Lo Bianco Company:

Date

Particular

Debit ($)

Credit ($)

Cash

3,000

Equipment

12,500

Accumulated Depreciation-Equipment

10,000

Loss on Disposal of Equipment

2,500

Equipment

28,000

Calculation of Loss on disposal of equipment

Computation of loss

Book value of old equipment

$18,000

Less: Fair value of old equipment

15,500

Loss on disposal of equipment

$ 2,500

03

(b) Preparing journal entries

The exchange has commercial substance

Carlos Arruza Company

Date

Particular

Debit ($)

Credit ($)

Equipment

15,500

Accumulated Depreciation-Equipment

19,000

Equipment

28,000

Cash

3,000

Gain on Disposal of Equipment

3,500

Calculation of Cost of new equipment

Cost of new equipment

Cash paid

$3,000

The fair value of old equipment

12,500

Cost of new equipment

$15,500

Computation of gain on disposal of equipment:

The fair value of old equipment

$12,500

Less: Book value of old equipment($28,000-$19,000)

9,000

Gain on disposal of equipment

$ 3,500

Tony LoBianco Company

Date

Particular

Debit ($)

Credit ($)

Cash

3,000

Equipment

12,500

Accumulated Depreciation-Equipment (Old)

10,000

Loss on Disposal of Equipment

2,500

Equipment

28,000

Working notes:

Calculation of Cost of new equipment

The fair value of equipment

$15,500

Less: Cash received

3,000

Cost of new equipment

$12,500

Computation of loss on disposal of equipment

Book value of old equipment ($28,000-$10,000)

$18,000

Less: Fair value of the equipment (Old)

15,500

Loss on disposal of equipment

$ 2,500

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Most popular questions from this chapter

(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for \(105,000, paying \)30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.

Instructions

(Round to two decimal places.)

  1. Prepare the journal entry(ies) at the date of purchase.
  2. Prepare the journal entry(ies) at December 31, 2017, to record the payment and interest (effective-interest method employed).
  3. Prepare the journal entry(ies) at December 31, 2018, to record the payment and interest (effective-interest method employed).

Ottawa Corporation owns machinery that cost \(20,000 when purchased on July 1, 2014. Depreciation has been recorded at a rate of \)2,400 per year, resulting in a balance in accumulated depreciation of \(8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for \)10,500. Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale.

(Purchase of Equipment with Zero-Interest-Bearing Debt) Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers鈥� demand for its product. Chippewas issues an \(800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five \)160,000 installments due at the end of each year over the life of the note.

Instructions (Round to nearest dollar in all computations.)

  1. Prepare the journal entry(ies) at the date of purchase.
  2. Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.
  3. Prepare the journal entry(ies) at the end of the second year to record the payment and interest.
  4. Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Cheng Company traded a used truck for a new truck. The used truck cost \(30,000 and has accumulated depreciation of \)27,000. The new truck is worth \(37,000. Cheng also made a cash payment of \)36,000. Prepare Cheng鈥檚 entry to record the exchange. (The exchange lacks commercial substance.)

Previn Brothers Inc. purchased land at a price of \(27,000. Closing costs were \)1,400. An old building was removed at a cost of $10,200. What amount should be recorded as the cost of the land?
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