*E10-15 Presented below are two independent transactions. Both transactions have

Question

*E10-15 Presented below are two independent transactions. Both transactions have com- mercial substance. 1. Mercy Co. exchanged old trucks (cost $64,000 less $22,000 accumulated deprecia- ( tion) plus cash of $17,000 for new trucks. The old trucks had a fair value of $38,000. 2. Pence Inc. trades its used machine (cost $12,000 less $4,000 accumulated depreciation) for a new machine. In addition to exchanging the old machine (which had a fair value of $11,000), Pence also paid cash of $3,000. Instructions (a) Prepare the entry to record the exchange of assets by Mercy Co. (b) Prepare the entry to record the exchange of assets by Pence Inc.

Explanation / Answer

Ans. 1 Accounts Titles & explanations Debit Credit New truck 55000 Accumulated depreciation 22000 Loss on exchange 4000 Old truck 64000 Cash 17000 Loss on exchange = Book value - Fair market value (64000 - 22000) - 38000 4000 *FMV of new truck: 38000 + 17000 55000 Ans. 2 Accounts Titles & explanations Debit Credit New Machine 14000 Accumulated depreciation 4000 Old Machine 12000 Cash 3000 Gain on exchange 3000 Gain on exchange: Fair value of old machine - Book value of old machine 11000 - (12000 - 4000) 3000 *FMV of new machine : 11000 + 3000 14000

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