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Exchange of Assets (Journal Entries)

Assume that the following cases are independent and rely on the following data. Make entries on the books of both companies. Show all computations.

Cowher Co. Hinson Co.
Equipment (cost) $450,000 $825,000
Accumulated depreciation 145,000 450,000
Fair market value of equipment 350,000 350,000

1. Cowher Co. and Hinson Co. traded the above equipment. The exchange has commercial substance.
2. Cowher Co. and Hinson Co. traded the above equipment. The exchange lacks commercial substance.

Assume that the following cases are independent and rely on the following data. Make entries on the books of both companies.
Cowher Co. Hinson Co.
Equipment (cost) $450,000 $825,000
Accumulated depreciation 145,000 525,000
Fair market value of equipment 280,000 350,000
Cash received (paid) (70,000) 70,000

3. Cowher Co. and Hinson Co. traded the above equipment. The exchange has commercial substance.

4. Cowher Co. and Hinson Co. traded the above equipment. The exchange lacks commercial substance.

Solution Preview

Attached Excel shows the entries including the rationale and the calculations for the entries. A comment is necessary about loss on transactions with no commercial substance: there is some discussion in the literature about the accounting treatment but generally no loss is recognized.

Lacks Commercial Substance ...

Solution Summary

The solution explains the rationale for the difference in transactions with commercial substance and those without even though the jury is still out on how to report those transactions. The presently preferred treatment is used in the problems.
Together with the journal entries are explanations to show how amounts were calculated.

$2.19