Question

In: Accounting

Sawyer Corporation has a machine (Machine A) that it acquired on 1/1/18 for $900,000. On 12/31/18...

Sawyer Corporation has a machine (Machine A) that it acquired on 1/1/18 for $900,000. On 12/31/18 such machines have a selling price and fair value of $1,035,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.

Brown Corporation has a machine (Machine B) that it acquired on 1/1/18 for $1215,000. On 12/31/18 such machines have a selling price and fair value of $900,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.

On 12/31/18 Brown gave Machine B plus $135,000 cash to Sawyer in return for
Machine A.

A) Assume that both Sawyer and Brown are new machine dealers and that the machines are still new. Also assume that the exchange lacks commercial substance. At what amount will Machine A be recorded on Brown’s books? What about Machine B on Sawyer’s books?

B) Assume that instead of dealers, both Sawyer and Brown are machine manufacturers and use the machines in production. Assume the exchange lacks commercial substance. At what amount will Brown record Machine A? What about Machine B on Sawyer’s books?

C) Given the assumption above except that the fair values of Machines A and B are $840,000 and $1,125,000, respectively, at what amount will Brown record Machine A?

D) Return to the original problem. Assume that Sawyer is a dealer selling new machines and that Brown is a manufacturer. Assume that the exchange has commercial substance. For this transaction, at what amount will Sawyer record machine b? What would Brown record Machine a?

E) Given the assumptions above except that the selling prices and fair market values of A and B are $1,260,000 and $1,125,000, respectively, at what amount will Brown record Machine A?

Solutions

Expert Solution

A) Assume that both Sawyer and Brown are new machine dealers and that the machines are still new. Also assume that the exchange lacks commercial substance. At what amount will Machine A be recorded on Brown’s books? What about Machine B on Sawyer’s books?

Brown Book: 1035000 (Fair Value of A)

Sawyer Book: 900000-(900000/1035000*135000)=900000-117391=782609

B) Assume that instead of dealers, both Sawyer and Brown are machine manufacturers and use the machines in production. Assume the exchange lacks commercial substance. At what amount will Brown record Machine A? What about Machine B on Sawyer’s books?

Brown Book: 1035000

Sawyer Book: 900000-(900000/1035000*135000)=900000-117391=782609

C) Given the assumption above except that the fair values of Machines A and B are $840,000 and $1,125,000, respectively, at what amount will Brown record Machine A?

Brown Book:1215000+(135000/10)=1228500

D) Return to the original problem. Assume that Sawyer is a dealer selling new machines and that Brown is a manufacturer. Assume that the exchange has commercial substance. For this transaction, at what amount will Sawyer record machine b? What would Brown record Machine a?

Sawyer Book: 900000

Brown book: 1215000+(135000/10)=1228500

E) Given the assumptions above except that the selling prices and fair market values of A and B are $1,260,000 and $1,125,000, respectively, at what amount will Brown record Machine A?

Brown Book: 1260000


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