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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 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.
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