Question

During the current year, Buffalo Construction trades an old crane that has a book value of $117,000 (original cost $182,000 less accumulated depreciation $65,000) for a new crane from Carla Manufacturing Co. The new crane cost Carla $214,500 to manufacture and is classified as inventory. The following information is also available. (Could you please show how you solve as well, not just the answers! Thanks!

Buffalo Const. Carla Mfg. Co.

Fair value of old crane		$106,600
Fair value of new crane					$260,000
Cash paid		153,400
Cash received					153,400

If we assume this exchange is considered to have commercial substance, what are the journal entries on the books of (1) Buffalo Construction and (2) Carla Manufacturing.

If we assume this exchange lacks commercial substance for Buffalo, what are the journal entries on the books of (1) Buffalo Construction and (2) Carla Manufacturing.

If we assume this exchange is considered to have commercial substance except that the fair value of the old crane is $127,400 and the cash paid is $132,600, what would the journal entries on the books of (1) Buffalo Construction and (2) Carla Manufacturing.

If we assume this exchange lacks commercial substance for Buffalo, except that the fair value of the old crane is $126,100 and the cash paid $133,900, what would the the journal entries on the books of (1) Buffalo Construction and (2) Carla Manufacturing.

Answer 1

(b)Lacks Commercial Substance
1.Buffalo Construction should record the same entry as in part (a) above, since the exchange resulted in a loss.
2.Carla should record the same entry as in part (a) above. No gain is deferred because we are assuming that Buffalo is a customer. In addition, because the cash involved is greater than 25% of the value of the exchange, the entire transaction is considered a monetary transaction and a gain is recognized.

Note: Even though the exchange lacks commercial substance, cashpaid exceeds 25% of total fair value ($133,900/($133,900 + $260,000)so the transaction is treated as a monetary exchange and recorded at fair value. Note that with this much cash involved, it is unlikely that the exchange would lack commercial substance.