In: Accounting
Q. Ramirez Company exchanged equipment used in its manufacturing operations plus $6,000 in cash for similar equipment used in the operations of Kennedy Company. The following information pertains to the exchange.
Ramirez Co Kennedy Co
Equipment (cost) 84,000 $84,000
Accumulated depreciation 57,000 30,000
Fair value of equipment 40,500 46,500
Cash given up 6,000
Instructions
Prepare the journal entries to record the exchange on the books of both companies. Assume that exchange lacks commercial substance.
(Amount in $)
Journal entry in the books of Ramirez Co:
Book Value of equipment given = Cost of equipment - Accumulated depreciation = 84000 - 57000 = 27000
Cash given = 6000
New equipment to be recorded = Book Value of equipment given + Cash given = 27000 + 6000 = 33000
Journal:
Equipment Dr 33000
Accumulated Depreciation - Equipment Dr 57000
Equipment (Cost) Cr 84000
Cash Cr 6000
Journal entry in the books of Kennedy Co:
If the carrying amount of the old asset is greater than the fair value of the assets received, the entire loss is booked and the new asset is recorded at the lower fair value.
Book Value of asset given (old assets) = Cost of equipment - Accumulated depreciation = 84000 - 30000 = 54000
Fair value of assets received = 40500
Cash received = 6000
Loss on exchange of assets = 54000 - 6000 - 40500 = 7500
Journal:
Equipment Dr 40500
Accumulated Depreciation - Equipment Dr 30000
Cash Dr 6000
Loss on exchange of assets Dr 7500
Equipment (Cost) 84000 Cr