On July 1, 2015, Flash Inc. and Polar Corp. finalized a transaction for the exch

Question

On July 1, 2015, Flash Inc. and Polar Corp. finalized a transaction for the exchange of equipment.

Flash has on its books equipment with an original cost of $15,000 and accumulated depreciation of $6,500. Polar's equipment originally cost $50,000 with accumulated depreciation of $42,000. The Fair Value of Polar's equipment is $10,000.

Flash exchanges its equipment with Polar, paying Polar $1,000 in cash.

Instructions: Prepare the Journal Entries to record the exchange on the books of both companies. Assume the transaction LACKS commercial substance.

(Journal Entries for Flash), (Journal Entries for Polar)

pleasse explasin and show work, please.

Explanation / Answer

FASB held that an exchange must have commercial substance to justify using fair value. In simple terms, the asset acquired has to be different from the asset surrendered as demonstrated by the amount and timing of future cash flows. Without a difference, no rationale exists for making the exchange. If a trade does not have commercial substance, net book value is retained for the newly received asset and no gain is recognized. Based on the actual decline in value, too much expense had been recognized.

So fair value is there but as it lacks commercial substance so we have to book entry on book value

In the books of Polar

Cash a/c Dr $1000

To Flash a/c $1000

As Flash paid Polar cash

Equipment a/c Dr $10000

Accumulated Depreciation a/c Dr $42000

To Equipment $50000

To gain (unrecognized) $2000

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