Question

1. Husky Corporation recently entered into an exchange to acquire new equipment to be used in its manufacturing process. The new equipment had a fair value of $200,000. In exchange for the new equipment, Husky traded in existing equipment that had an original cost of $300,000, and accumulated depreciation of $240,000, plus paid cash of $125,000. Record the journal entry for this exchange assuming that the exchange:
   1. Has commercial substance

B.Lacks commercial substance

Answer 1

Answer (A) : asset exchanged has commercial substance, then General journal is :-

Date	Account title	Debit	Credit
	PPE (new)	$ fair value
	CASH	$ received amount
	PPE (old)		$ carrying amount
	CASH		$ paid amount

Note : Any difference arises at the time of exchange will be transferred to P or L.

Therefore General journal when equipment exchanged has a commercial substance is :

Date	Account title	Debit	Credit
	New equipment	$ 2,00000
	Existing equipment ($3,00,000 - $2,40,000 = $ 60,000)		$ 60,000
	CASH		$ 1,25,000
	P or L (Gain) ($2,00,000 - $60,000 - $ 1,25,000 = $ 15,000)		$ 15,000

Answer (B) : asset exchanged lacks commerical substance then General journal is :

Date	Account title	Debit	Credit
	PPE (new)	$(carrying amount + paid amount - received amount)
	CASH	$ received amount
	PPE (old)		$ carrying amount
	CASH		$ paid amount

Therefore,

General journal when equipment exchanged where commercial substance lacks :

Date	Account title	Debit	Credit
	New equipment	$1,85,000
	Old equipment ($3,00,000 - $2,40,000 = $60,000)		$ 60,000
	Cash		$ 1,25,000