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Nonmonetary Exchanges You have two clients that are considering trading machinery with each other Although the machines are different from each other you believe that an assessment

(Nonmonetary Exchanges) You have two clients that are considering trading machinery with each other. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your clients would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:

 

Client   A

Client   B

Original cost

$100,000  

$150,000  

Accumulated depreciation

40,000  

80,000  

Fair value

80,000  

100,000  

Cash received (paid)

(20,000)  

20,000  

Instructions

(a) Record the trade-in on Client A’s books assuming the exchange has commercial substance.

(b) Record the trade-in on Client A’s books assuming the exchange lacks commercial substance.

(c) Write a memo to the controller of Company A indicating and explaining the dollar impact on current and future statements of treating the exchange as having versus lacking commercial substance.

(d) Record the entry on Client B’s books assuming the exchange has commercial substance.

(e) Record the entry on Client B’s books assuming the exchange lacks commercial substance.

(f) Write a memo to the controller of Company B indicating and explaining the dollar impact on current and future statements of treating the exchange as having versus lacking commercial substance.

May 21 2020 View more View Less

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