Question

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.

Answer 1

(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