In: Accounting
Shamrock Ltd. exchanged equipment used in its manufacturing
operations for equipment used in the operations of Annon Ltd. The
following information pertains to the exchange:
Shamrock Ltd. | Annon Ltd. | |||
Equipment (cost) | $84,100 | $84,100 | ||
Accumulated depreciation | 46,600 | 40,200 | ||
Fair value of old equipment | 42,100 | 42,900 | ||
Cash given up | 800 |
Both companies agreed that the exchange had commercial substance
for both companies. Prepare the necessary journal entries to record
the asset exchange on the books of both companies.
(Credit account titles are automatically indented when
the amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for
the amounts.)
Account Titles and Explanation |
Debit |
Credit |
Shamrock Ltd.: | ||
Annon Ltd.: | ||
Firstly we need to calculate gain or loss on exchange of asset which is shown as follows:-
Shamrock Ltd | Annon Ltd. | |
Fair Value of Old Equipment | 42,100 | 42,900 |
Book Value of Equipment: | ||
(Cost - Accumulated depreciation) (84,100-46,600) | (37,500) | |
(84,100-40,200) | (43,900) | |
Gain or (Loss) on Exchange | 4,600 | (1000) |
The necessary entries to record the asset exchange if the exchange did not have commercial substance is shown as follows:-
IN THE BOOKS OF SHAMROCK LTD
As the exchange lacks commercial substance, the new equipment would be debited with sum of book value and cash paid. Gain on exchange will not be recognized as no cash is received on exchange.
Journal Entries (Amounts in $)
Account Titles and Explanations | Debit | Credit |
Equipment (New) (37,500+800) | 38,300 | |
Accumulated Depreciation | 46,600 | |
Equipment (Old) | 84,100 | |
Cash | 800 | |
(To record the exchange of equipment) |
IN THE BOOKS OF ANNON LTD
Journal Entries (Amounts in $)
Account Titles and Explanations | Debit | Credit |
Equipment (New) | 42,100 | |
Accumulated Depreciation | 40,200 | |
Cash | 800 | |
Loss on Exchange | 1000 | |
Equipment (Old) | 84,100 | |
(To record the exchange of equipment) |