Brooke & co. has a machine that cost $1,000,000 on January 1, 2011. This old mac

Question

Brooke & co. has a machine that cost $1,000,000 on January 1, 2011. This old machine had an estimated life of ten years with no salvage value, accumulated depreciation of $500,000 and has current fair value of $600,000. On December 31st, 2016, Brooke exchanges the old machine plus $60,000 for a machine owed by Pasta Inc. with a fair value of $660,000. Tomas Inc. had purchased the machine for $800,000 and it has a book value of $540,000. Assume that the last fiscal period ended on December 31, 2015, and that straight-line depreciation is used. (a) Prepare the journal entries for both Brooke and Tomas to record the exchange 1. Assuming that the transaction had commercial substance 2. Assuming that the transaction lacked commercial substance

Explanation / Answer

Journal entry in the books of Brooke

Accumulated Depreciation $500,000

New Machine $660,000

Cash $60,000

Old Machine $1,000,000

Gain on exchange $100,000

Journal entry in the books of Tomas

Accumulated Depreciation $ 260,000

New Machine $ 540,000

Old Machine $ 800,000

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