You have two clients that are considering trading machinery with each other. Alt
ID: 2469800 • Letter: Y
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
Answer the following and explain how you derived your answer
Record the entry on Client B's books assuming the exchange has commercial substance.
Client A
Client B
Original cost $100,000 $150,000 Accumulated depreciation 40,000 80,000 Fair value 80,000 100,000 Cash received (paid) (20,000) 20,000Explanation / Answer
(d) Record the entry on Client B's books assuming the exchange has commercial substance.
If the exchange has commercial substance For client B, the total market value
received is 80,000 plus 20,000 cash received. And the total book value given is
150,000- 80,000=70,000. So there will be 30,000 gain realized.
Machinery A 80,000
Accumulated Depreciation—Machinery B 80,000
Cash 20,000
Machinery B 150,000
Gain on disposal B 30,000
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