Question

Cost of machinery traded (old machine) $120,000 Accumulated depreciation to date of sale (old machine) 50,000 Fair value of machinery traded (old machine) 93,000 Cash received 7,000 Fair value of machinery acquired (new machine) 86,000 Record the journal entry for the above non monetary asset exchange for the following scenarios: a. The transaction has commercial substance. b. The transaction lacks commercial substance.

Answer 1

Answer:

a.

Cash $7,000 (debit)

Machinery Acquired $93,000 (debit)

Old Machine - Accumulated Depreciation $50,000 (debit)

Old Machine - Cost $120,000 (credit)

Gain on Exchange $30,000 (credit)

b.

Cash $7,000 (debit)

Machinery Acquired $70,000 (debit)

Old Machine - Accumulated Depreciation $50,000 (debit)

Old Machine - Cost $120,000 (credit)

Gain on Exchange $7,000 (credit)

Explanation:

a. The transaction has commercial substance.

IAS 16 requires the Asset Acquired to be measured at Fair Value

Cash $7,000 (debit)

Machinery Acquired $93,000 (debit)

Old Machine - Accumulated Depreciation $50,000 (debit)

Old Machine - Cost $120,000 (credit)

Gain on Exchange $30,000 (credit)

b. The transaction lacks commercial substance.

IAS 16 requires the Asset Acquired to be measured at Carrying Amount of Asset given up.

Cash $7,000 (debit)

Machinery Acquired $70,000 (debit)

Old Machine - Accumulated Depreciation $50,000 (debit)

Old Machine - Cost $120,000 (credit)

Gain on Exchange $7,000 (credit)