Question

Bravo traded a Ford truck for a Chevy truck. Bravo received a trade in allowance of $16,000 for the Ford truck. The Chevy truck has a fair market value of $70,000. The Ford truck was originally purchased for $50,000 and $40,000 of accumulated depreciation has been recorded for the truck.

Record the transaction above under the following independent circumstances:

a. The transaction has commercial substance.

b. The transaction lacks commercial substance

Please show all work and explanations

Answer 1

A) The Trasanction has commercial substance:-

Particulars		Debit	Credit
Chevy truck a/c	Dr	70,000.00
Cash   a/c	Dr	16,000.00
Accumulated depreciation a/c	Dr	40,000.00
To Ford Truck a/c	Cr		50,000.00
To gain A/c	Cr		76,000.00
Note :	Amount
A)New asset recived for $70000,	$70,000
B) cash recived for $16000	$16,000
C)Accumulated depreciation in credit balance to be debited while exchange	$40,000
D) Total (A+B+C)	$126,000
E)Original cost of old asset	$50,000
F ) Gain (D-E)	$76,000

b. The transaction lacks commercial substance

Particulars		Debit	Credit
Chevy truck a/c	Dr	10,000.00
Cash a/c	Dr	16,000.00
Accumulated depreciation a/c	Dr	40,000.00
To Ford Truck a/c	Cr		50,000.00
To cash gain a/c	Cr		16,000.00
Note:
In case where the lack of commercial substance , Book value of the old asset to be taken up the value of the new asset (i.e Book value of Ford truck =$ 10000(original cost 50000-accumulated depreciation 40000)