Carlos Arruza Company exchanged equipment used in its manufacturing operations p
ID: 2460008 • Letter: C
Question
Carlos Arruza Company exchanged equipment used in its manufacturing operations plus $3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.
Carlos Arruza Co. Tony LoBianco Co.
Equipment (cost) $28,000 $28,000
Accumulated depreciation 19,000 10,000
Fair value of equipment 12,500 15,500
Cash given up 3,000
a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.
Explanation / Answer
(a) Lacks Commercial Substance
(b) Has Commercial Substance
Calculation of Gain or Loss Arruza LoBianco Fair Value of Old Equipment $12,500 $15,500 Less: Book Value of Equipment ($9,000) ($18,000) Gain (or Loss) on Exchange $3,500 ($2,500)