Question

Splish Brothers Inc. purchased a commercial grade soft-serve ice cream machine on September 30, 2017. Splish Brothers traded in its existing machine and paid cash in the transaction. The details of the transaction are as follows: ● List price of new freezer $18,260 ● Cash paid 12,144 ● Cost of old machine (4-year life, $1,320 salvage value) 15,400 ● Accumulated depreciation—old machine (straight-line) 7,040 ● Secondhand fair value of old machine 5,896 Prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Splish Brothers’s fiscal year ends on December 31, and Splish Brothers recorded depreciation on the old machine through September 30, 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

Answer to the question is as follows :

Part (a) - Commercial Substance

Particulars	Amount Dr.	Amount Cr.
Accumulated Depreciation A/c (Old Machine)….............Dr.	$          7,040
New Ice Cream Machine A/c ….........................................................Dr.	$        18,040
Loss on Exhange of Assets A/c….....................................Dr.	$          2,104
To Cash A/c …. Cr.		$        12,144
Old Ice Cream Machine A/c …. Cr.		$        15,040
(being Assets exchanged - commercial substance)

Note :

1. New Ice Cream Machine is recorded at - Cash Paid + Fair Value of Old Asset Exchanged (on date of exhange)

2. Loss on Exhange of Assets is the balancing figure.

Part (a) - No Commercial Substance

Particulars	Amount Dr.	Amount Cr.
New Ice Cream Machine A/c ….........................................................Dr.	$        18,040
Loss on Exhange of Assets A/c….....................................Dr.	$          2,104
To Cash A/c …. Cr.		$        12,144
Old Ice Ceam Machine A/c …. Cr.		$          8,000
(being Assets exchanged - no commercial substance)

Note :

1. Old Ice Cream Machine is credited its net Carrying Value, i.e. = Book Value - Accumulated Depreciation.

= 15,040 - 7,040 = $ 8,000

2. Loss is recognized as Old Asset Fair Value - Old Asset Carrying Value = 5,896 - 8,000 = $ 2,104