Assume that the following cases are independent and rely on the following data. Make the necessary entries on the books of both companies.
See attached file for data.
Case 1: Bakken Co. and Farley Co. traded the above equipment. Assume the transaction has commercial substance.
Case 2: Bakken Co. and Farley Co. traded the above equipment. Assume the transaction lacks commercial substance.
Before we start to answer this specific question, I think it is important to first understand the following concepts:
Monetary Transactions: At least 25% of the total value is in cash. Gains and losses are always recorded
Non-Monetary Transactions: Less than 25% of the total value is in cash. Losses are always recorded. Gains are only recorded if commercial substance exists, unless the company receives cash, in which case a partial gain can be recorded.
** For Farley Co., this is a non-monetary transaction because cash is less than 25% of the total value in transaction (cash $84,000 / Fair Market Value $420,000 = 20%).
The Net Book Value of the equipment ...
This solution provides book entries for a company.