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24 May, 07:57

Splish Company exchanged equipment used in its manufacturing operations plus $4,320 in cash for similar equipment used in the operations of Blossom Company. The following information pertains to the exchange. Splish Co. - Blossom Co. Equipment (cost) - $40,320 - $40,320 Accumulated depreciation - 27,360 - 14,400 Fair value of equipment - 18,000 - 22,320 Cash given up - 4,320a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance. b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

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  1. 24 May, 10:42
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    A) without commercial substance

    Splish Company

    Dr Equipment new 17,280 (book value of old equipment + cash)

    Cr Equipment old 12,960

    Cr Cash 4,320

    Blossom Company

    Dr Equipment new 21,600 (book value of old equipment - cash)

    Dr Cash 4,320

    Cr Equipment old 25,920

    Since the boot value is less than 25% of the carrying value of the asset, no gain or loss must be recognized. When you are preparing the journal entries, you must record the carrying value of the asset + / - any boot value given or taken included in the exchange.

    B) with commercial substance

    Splish Company

    Dr Equipment new 22,320 (FMV)

    Dr Accumulated depreciation - equipment old 27,360

    Cr Equipment old 40,320

    Cr Cash 4,320

    Cr Gain on exchange 5,040

    Blossom Company

    Dr Equipment new 18,000 (FMV)

    Dr Accumulated depreciation - equipment old 14,400

    Dr Cash 4,320

    Dr Loss on exchange 3,600

    Cr Equipment old 40,320
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Home » Business » Splish Company exchanged equipment used in its manufacturing operations plus $4,320 in cash for similar equipment used in the operations of Blossom Company. The following information pertains to the exchange. Splish Co. - Blossom Co.
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