Question

In: Accounting

Shamrock Ltd. exchanged equipment used in its manufacturing operations for equipment used in the operations of...

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.:

Solutions

Expert Solution

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)

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