Cheyenne Company exchanged equipment used in its manufacturing operations plus $
ID: 2590055 • Letter: C
Question
Cheyenne Company exchanged equipment used in its manufacturing operations plus $3,540 in cash for similar equipment used in the operations of Ayayai Company. The following information pertains to the exchange.
Cheyenne Co. Ayayai Co.
Equipment (cost) $33,040 $33,040
Accumulated depreciation 22,420 11,800
Fair value of equipment 14,750 18,290
Cash given up 3,540
1. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
2. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.
Explanation / Answer
1) Exchange lacks Commercial Substance
a) Cheyenne Company
Equipment
14,160
Accumulated Depreciation—Equip
22,420
Equipment
33,040
Cash
3,540
Working:
Vaulation of equipment: 10,620 +3540 = 14,160
b) Ayayai Co.
Cash
3,540
Equipment
14,750
Accumulated Depreciation—Equip
11,800
Loss on Disposal of Plant Assets
2,950
Equipment
33,040
Working: Loss = Book value of old equipment - Fair value of old equipment = 21240 - 18290 = 2950
2) Exchange has Commercial Substance
a) Cheyenne Company
Equipment
18290
Accumulated Depreciation—Equip
22420
Equipment
33040
Cash
3540
Gain on Disposal of Plant Assets
4130
Working: =14750 - (33040 - 22420) = 4130
b) Ayayai Co.
Cash
3540
Equipment
14750
Accumulated Depreciation—Equip
11800
Loss on Disposal of Plant Assets
2950
Equipment
33040
Equipment
14,160
Accumulated Depreciation—Equip
22,420
Equipment
33,040
Cash
3,540
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