Question

Titleist Inc. exchanges its used golf club casting equipment with Callaway Inc. in exchange for a newer piece of casting machinery. The book value of Titleist’s used machine is $75,000 (original cost of $100,000 and accumulated depreciation of 25,000). Titleist also receives $40,000 cash from Callaway. This exchange is deemed to lack commercial substance. Make the appropriate journal entries

(2a) If the fair market value of Titleist’s machine is $60,000, how would Titleist account for this transaction?

(2b) If the fair market value of Titleist’s machine is $80,000, how would Titleist account for this transaction? Is there a partial gain? Please show how you got your answer?

Answer 1

a)	Book Value of the old Machine	100,000
	Less: Depreciation	25,000
	Total Book Value of the Machine	75,000
	Fair Market Value of the Machine	60,000
	Less: Amount Received in Cash	40,000
	Total Cost of the New Machine	20,000
	Journal Entry
	Machine Account	20,000
	Accumulated Depreciation	25,000
	Cash	40,000
	Loss On Machine	15,000
	Machine (Old)		100,000
b)	Book Value of the old Machine	100,000
	Less: Depreciation	25,000
	Total Book Value of the Machine	75,000
	Fair Market Value of the Machine	80,000
	Less: Amount Received in Cash	40,000
	Total Cost of the New Machine	40,000
	Journal Entry
	Machine Account	40,000
	Accumulated Depreciation	25,000
	Cash	40,000
	Gain on Sale of Machine		5,000
	Machine (Old)		100,000