Question

Sarasota Company exchanged equipment used in its manufacturing operations plus $3,720 in cash for similar equipment used in the operations of Ivanhoe Company. The following information pertains to the exchange. Sarasota Co. Ivanhoe Co. Equipment (cost) $34,720 $34,720 Accumulated depreciation 23,560 12,400 Fair value of equipment 15,500 19,220 Cash given up 3,720

Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance. (Credit account titles are automatically indented when 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 Sarasota Company: enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount Ivanhoe Company: enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount

Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance. (Credit account titles are automatically indented when 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 Sarasota Company enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount Ivanhoe Company enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount

Answer 1

Exchange lacks commercial substance

Account Titles and Explanation	Debit	Credit
Sarasota Company:
Accumulated Depreciation	23560
Equipment (new) (book value of old + cash paid)	14880
Equipment (old)		34720
Cash		3720
Ivanhoe Company:
Accumulated Depreciation	12400
Equipment (new) (book value of old - cash received)	18600
Cash	3720
Equipment (old)		34720

New asset is recorded at book value of old asset + cash paid

No gain or loss on exchange since recorded at book value

Exchange has commercial substance

Account Titles and Explanation	Debit	Credit
Sarasota Company:
Accumulated Depreciation	23560
Equipment (new) (fair value of old + cash paid)	19220
Equipment (old)		34720
Cash		3720
Gain on disposal		4340
Ivanhoe Company:
Accumulated Depreciation	12400
Equipment (new) (fair value of old - cash received)	15500
Cash	3720
Loss on disposal	3100
Equipment (old)		34720

New asset is recorded at fair value of old asset + cash paid

Difference between fair value and book value of old asset is the gain/(loss) on exchange