Question

Ricardo Heavy Hauling has some earth-moving equipment that cost $362,000; accumulated amortization is $241,400. Ricardo traded equipment with another construction company. The fair value of Ricardo’s old equipment is estimated to be $188,500, and the fair value of the equipment being acquired is estimated to be $238,800. Four different possible scenarios are presented below:

1. The new equipment will perform essentially the same tasks as the old equipment. The estimate of the fair value of the new equipment is the more reliable of the two estimates. The exchange is a straight swap and no cash changes hands.
2. The new equipment has very different functions than the old equipment. The new equipment will permit Ricardo to attract new business that it had previously been unable to obtain. The fair value estimate of the new equipment is the more reliable of the two estimates. The exchange is a straight swap and no cash changes hands.
3. In addition to exchanging its old equipment, Ricardo pays $20,200 cash. The characteristics of Ricardo’s operating cash flows will change as a result of the exchange. The fair value of the old equipment is the more reliable estimate.
4. Assume the same facts as in (c) above, except that the exchange will not significantly alter Ricardo’s cash flows.
5. A large truck, which cost Company A $84,200 ($50,500 accumulated depreciation), has a market resale value of $59,000. The truck is traded to a dealer, plus a cash payment of $16,800, for a new truck that will perform essentially the same services as the old truck, but will look a lot nicer to the customers. The new truck has a list price of $79,800, although discounts of 3% to 4% may be negotiable.
6. Rochester Shipping Co. received a new ferry that has a normal purchase price of $1.90 million. In exchange, the company gave the vendor a parcel of land and a building located on the waterfront. The market value of the land and building is $1.72million. The land cost $448,600; the building cost $1,046,800 and is 30% depreciated. The vendor will use the land and building to operate a maintenance facility. The new ferry will enable Rochester Shipping to launch a new ferry service across Lake Ontario. The ferry was available because the buyer for whom it had been built went bankrupt and was unable to take delivery. The boat remained unsold for two years before Rochester was able to negotiate the exchange. Because the boat had been dormant for so long, it needed some upgrading and maintenance. Rochester agreed to pay for the necessary work, which was estimated to cost $450,000.

7 Journal Entries---Transaction List:

• 1. Record the exchange assuming the new equipment will perform essentially the same tasks as the old equipment.

• 2. Record the exchange assuming the new equipment has very different functions than the old equipment, and recognise gain/loss on exchange.

• 3. Record the exchange assuming Ricardo pays $20,200 cash in addition and operating cash flows will change as a result of the exchange, and gain/loss on exchange.

• 4. Record the exchange assuming Ricardo pays $20,200 cash in addition and the exchange will not significantly alter Ricardo’s cash flows.

• 5. Record the exchange assuming a large truck, which cost Company A $84,200 ($50,500 accumulated depreciation), has a market resale the truck is traded to a dealer, plus a cash payment of $59,000, value of $16,800, new truck has a list price of $79,800, although discounts of 3% to 4% may be negotiable.

• 6. Record the exchange assuming Rochester Shipping Co. received a new ferry that has a normal purchase price of $1.90 million, The market value of the land and building is $1.72 million. The land cost $448,600; the building cost $1,046,800 and is 30% depreciated.

• 7. Record the exchange assuming Rochester agreed to pay for the necessary work, which was estimated to cost $450,000.

Answer 1

Answer-

W.No:-1	If the exchange in transaction involves Commercial substance then profit or loss on echnage will be recongnised otherwise it will be recongnised only on book value.
W.No:-2	Cost of earth-moving equipment	3,62,000
	Accumulated depreciation	2,41,400
	Book Value (A)	1,20,600
	Cash Paid (B)	-
	Fair Value (C )	2,38,800
	Profit or (Loss) on Exchange (C-B-A)	1,18,200
W.No:-3	Cost of earth-moving equipment	3,62,000
	Accumulated depreciation	2,41,400
	Book Value (A)	1,20,600
	Cash Paid (B)	20,200
	Fair Value (C )	1,88,500
	Profit or Loss on Exchange (C-B-A)	47,700
W.No:-4	Cost of Truck	84,200
	Accumulated depreciation	50,500
	Book Value (A)	33,700
	Cash Paid (B)	16,800
	Fair Value (C )	79,800
	Profit or Loss on Exchange (C-B-A)	29,300
W.No.:-5	We are ingnoring discount as it I not fixed.
W.No:-6	Cost of Land	4,48,600
	Cost of Building (1)	10,46,800
	Accumulated depreciation (1*30%)	3,14,040
	Total Book Value of Land and Building	11,81,360
	Cash Paid (B)	4,50,000
	Fair Value (C )	19,00,000
	Profit or Loss on Exchange (C-B-A)	2,68,640

	Particulars	Account	Amount Debit ($)	Amount Credit ($)
Journal (a)	New Equipement	A/c Dr.	1,20,600
	Old Equipment	A/c Cr.		1,20,600
	(Being new equipemnt exchnaged with old equipment)
	(Refer W.No:-1)
Journal (b)
	New Equipement	A/c Dr.	2,38,800
	Profit on Exchange	A/c Cr.		1,18,200
	Old Equipment	A/c Cr.		1,20,600
	(Being new equipemnt exchnaged with old equipment)
	(Refer W.No:-1 and 2)
Journal (c )	New Equipement	A/c Dr.	1,88,500
	Profit on Exchange	A/c Cr.		47,700
	Old Equipment	A/c Cr.		1,20,600
	Cash	A/c Cr.		20,200
	(Being new equipemnt exchnaged with old equipment)
	(Refer W.No:-1 and 3)
Journal (d)	New Equipement	A/c Dr.	1,40,800
	Old Equipment	A/c Cr.		1,20,600
	Cash	A/c Cr.		20,200
	(Being new equipemnt exchnaged with old equipment)
	(Refer W.No:-1)
Journal (e )	New Equipement	A/c Dr.	79,800
	Profit on Exchange	A/c Cr.		29,300
	Old Equipment	A/c Cr.		33,700
	Cash	A/c Cr.		16,800
	(Being new equipemnt exchnaged with old equipment)
	(Refer W.No:-1, 4 and 5)
Journal (f)	Ferry	A/c Dr.	19,00,000
	Profit on Exchange	A/c Cr.		2,68,640
	Land and Building	A/c Cr.		11,81,360
	Cash	A/c Cr.		4,50,000
	(Being Ferry acquired in exchange of land and Building)
	(Refer W.No:-1 and 6)