You have two clients that are considering trading machinery

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 has commercial substance.

Solution

(d) Record the entry on Client B\'s books assuming the exchange has commercial substance.

If the exchange has commercial substance For client B, the total market value

received is 80,000 plus 20,000 cash received. And the total book value given is

150,000- 80,000=70,000. So there will be 30,000 gain realized.

Machinery A 80,000

Accumulated Depreciation—Machinery B 80,000

Cash 20,000

Machinery B 150,000

Gain on disposal B 30,000