Question

Two independent companies, Bayer and Monsanto are in the chemical and pharmaceutical industries. Each owns a piece of laboratory equipment used in research and development of new products, but each would like the other firm’s equipment. They agree to exchange the equipment. An appraiser was hired, and from her report and the companies' records, the following information was obtained: Bayer’s Equipment Monsanto's Equipment Cost $826,000 $460,000 Accumulated depreciation $250,000 $100,000 Fair value based upon appraisal $720,000 $630,000 The exchange was made and based on the difference in appraised fair values. Monsanto paid $90,000 to Bayer.

1 a Prepare the entries on both companies' books assuming the exchange had no commercial substance.

1 b Also prepare the journal entries on both companies’ books assuming the exchange had commercial substance.

Answer 1

	Bayer's Equipment	Monsanto's Equipment
	B	M
Cost	826000	460000
Accumulated Depreciation	250000	100000
Fair Value	720000	630000
Paid 90000 to Bayer
No Commercial Substance Involved
In the books of Bayer				In the books of Mosanto
Cash	90000			B	450000
M	497250			Accumulated Depreciation on M	100000
Accumulated Depreciation on B	250000			To cash		90000
To B		826000		To M		460000
To Realized Gain		11250
Commercial Substance Involved
In the books of Bayer				In the books of Mosanto
Cash	90000			B	720000
M	630000			Accumulated Depreciation on M	100000
Accumulated Depreciation on B	250000			To cash		90000
To B		826000		To M		460000
To Gain on exchange		144000		To Gain on exchange		270000