Wendell Corporation exchanged an old truck and $25,500 cash for a new truck.
The old truck had a book value of $6,000 (original cost of $25,000 less $19,000 in accumulated depreciation) and a fair value of $7,700.
Required:
1. Prepare the journal entry to record the exchange. Assume the exchange has commercial substance.
2. Prepare the journal entry to record the exchange assuming that the exchange lacks commercial substance.
no answer?
To answer your question, we need to understand the concept of the fair value and the commercial substance in accounting.
1. Prepare the journal entry to record the exchange assuming the exchange has commercial substance:
When an exchange has commercial substance, it means that the economic future for the company is expected to change as a result of the transaction.
In this case, the fair value of the old truck is greater than its book value, indicating that the exchange has commercial substance. The journal entry to record the exchange would be as follows:
Debit: New Truck
$7,700 (fair value of the old truck)
Debit: Accumulated Depreciation
$19,000 (To remove the accumulated depreciation of the old truck)
Credit: Old Truck
$25,000 (original cost of the old truck)
Credit: Cash
$25,500 (cash paid for the new truck)
2. Prepare the journal entry to record the exchange assuming that the exchange lacks commercial substance:
When an exchange lacks commercial substance, it means that the economic future for the company is not expected to change significantly.
In this scenario, the book value of the old truck exceeds its fair value, indicating that the exchange lacks commercial substance. The journal entry to record the exchange would be as follows:
Debit: New Truck
$7,700 (fair value of the old truck)
Debit: Accumulated Depreciation
$19,000 (To remove the accumulated depreciation of the old truck)
Debit: Loss on Exchange
$1,300 [(Book value of the old truck) - (Fair value of the old truck)]
Credit: Old Truck
$25,000 (original cost of the old truck)
Credit: Cash
$25,500 (cash paid for the new truck)
Please note that these journal entries are just examples based on the information provided, and it is always recommended to consult with a professional accountant for an accurate recording of transactions.
1. Journal entry to record the exchange with commercial substance:
Date Account Debit Credit
-------------------------------------------------------------------
Truck (new) $25,500
Accumulated Depreciation $19,000
Cash $7,700
Truck (old) $25,000
Explanation: The new truck is recorded at its cost of $25,500, which is the fair value of the old truck plus the cash paid. The accumulated depreciation on the old truck is removed from the books, as it is no longer applicable. The cash paid is debited, while the old truck is removed from the books.
2. Journal entry to record the exchange without commercial substance:
Date Account Debit Credit
-------------------------------------------------------------------
Truck (new) $7,700
Accumulated Depreciation $19,000
Cash $25,500
Loss on Disposal $6,800
Truck (old) $25,000
Explanation: Since the exchange lacks commercial substance, the new truck is recorded at its fair value of $7,700, which is lower than its cost. The accumulated depreciation on the old truck is removed from the books. The cash paid is debited, and a loss on disposal is recognized for the difference between the fair value of the old truck and its book value. The old truck is removed from the books.