Question

Santana Company exchanged equipment used in its manufacturing operations plus $2,000 in cash for similar equipment used in the operations of Delaware Company. The following information pertains to the exchange.
Santana Co. | Delaware Co.
Equipment (cost) $28,000 | $18,000
Accumulated depreciation 9,000 | 10,000
Fair value of equipment 14,000 | 16,000
Cash given up 2,000
Please indicate whether an account is an asset (A), liability (L), or equity (E) for journal entries, adjusting entries, and closing entries.
Prepare the journal entries to record the exchange on the book of Santana Co. and Delaware Co. Assume that the exchange lacks commercial substance.

Answer 1

Solution :

We know that the exchange takes place when the FMV receive is equal to the FMV given up.

Where the FMV = fair market value

The commercial substance means the future cash flows exchange.

The non monetary exchange refers to the cash which is less than 25% of the fair value exchange.

The journal entries for the Santana Corp. when the exchange lack the commercial substance are reported as :

Transaction                                           Debit ($)                 Credit ($)

Asset(new)                                           11,000

Accumulated depreciation(old)          9,000

Asset (old)                                                                       28,000

Cash                                                                                 2000

The journal entries for Delaware Corp. when the exchange lacks the commercial substance.

Transaction                                           Debit ($)                 Credit ($)

Asset(new)                                            16,000  

Accumulated depreciation (old)          10,000

Loss                                                                                      2500

Assets (old)                                                                           28,000