You have two clients that are considering trading machinery with each other. Alt

Question

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

Answer the following and explain how you derived your answer

Record the entry on Client B's books assuming the exchange lacks commercial substance.

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

Explanation / Answer

Machinery A/c $80,000

Cash A/c $20,000

To Machinery $100,000

The exchange of machinery has been recorded on fair value basis

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