Wasson Farming Corporation owned many tractors. The company has usually contract
ID: 2569078 • Letter: W
Question
Wasson Farming Corporation owned many tractors. The company has usually contracted with a trucking company to haul the tractors to the tractor dealership for repairs. With the aging of the tractors, the company is incurring substantial hauling costs because of the increasing frequency of repairs. The company is considering trading a tractor for a trailer, thereby enabling it to haul tractors without having to hire a trucking company. This exchange transaction would significantly improve the company's cash flow and does have "commercial substance."
The trailer that will be acquired in the exchange has a fair value of $35,000. Wasson owns two tractors that are currently valued at $35,000. One of these two tractors will be exchanged (and no boot will be involved). The owner of Wasson Farming is deciding which tractor to give up, and is interested in learning about the financial statement impact of the exchange. Prepare alternative journal entries, assuming an exchange of Tractor A versus Tractor B. Facts about each tractor follow:
Tractor A Cost, $100,000; accumulated depreciation $80,000
Tractor B Cost, $75,000; accumulated depreciation $25,000
GENERAL JOURNAL
Date Accounts Debit Credit
Tractor A
Tractor B
Explanation / Answer
As per IAS 16, If an item of property, plant and equipment is acquired in exchange for a non-monetary asset, then the cost of such an item is measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable.
In this case , the transaction have the Commercial Substance, so we have to value the asset at fair value.
Also standard mentions, If an entity is able to measure reliably the fair value of both the assets received and given up, then the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident.
So, in this Case we will consider the fair value of tractor which is $35,000
Tractor A:
If Tractor A is Exchanged with Trailer
Date
Accounts
Debit($)
Credit($)
XXXX
Trailer A/c
35000
Accumulated Depreciation
80000
Tractor A/c
100000
Profit and Loss A/c
15000
Tractor B:
If Tractor B is Exchanged with Trailer
Date
Accounts
Debit($)
Credit($)
XXXX
Trailer A/c
35000
Accumulated Depreciation
25000
Profit and Loss A/c
15000
Tractor A/c
75000
Date
Accounts
Debit($)
Credit($)
XXXX
Trailer A/c
35000
Accumulated Depreciation
80000
Tractor A/c
100000
Profit and Loss A/c
15000
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