Question

Santana Company exchanged equipment used in its manufacturing operations plus $2,000 in cash for similar equipment used in the operations of Delaware Company. The following information pertains to the exchange.

Santana Co. | Delaware Co.

Equipment (cost) $28,000 | $18,000

Accumulated depreciation 9,000 | 10,000

Fair value of equipment 14,000 | 16,000

Cash given up 2,000

Please indicate whether an account is an asset (A), liability (L), or equity (E) for journal entries, adjusting entries, and closing entries.

Prepare the journal entries to record the exchange on the book of Santana Co. and Delaware Co. Assume that the exchange lacks commercial substance.

Answer 1

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Santana Company

When the exchange lacks commercial substance then in case of gain accounting should be done at book value and not fair value. Gains are also not recorded in this case.

For Santana	Amount $
Cost of old equipment	28,000.00
Less: Accumulated depreciation	9,000.00
Book value of old equipment	19,000.00
Add: Cash paid to complete the exchange	2,000.00
Fair value of new equipment	21,000.00
Journal Entry
Account	Debit $	Credit $
New equipment	21,000.00
Accumulated depreciation- Old equipment	9,000.00
Old equipment		28,000.00
Cash		2,000.00

For Delaware	Amount $
Cost of old equipment	18,000.00
Less: Accumulated depreciation	10,000.00
Book value of old equipment	8,000.00
Less: Cash received to complete the exchange	2,000.00
Fair value of new equipment	6,000.00

Journal Entry
Account	Debit $	Credit $
New equipment	6,000.00
Accumulated depreciation- Old equipment	10,000.00
Cash	2,000.00
Old equipment		18,000.00