Homework Answers
Solution:
1. Assuming exchange has commercial substance.
Ayayai Inc's Books
Gain on machinery = Fair value - ( Original cost - Accumulated Depreciation)
| Account Titles and Explanation | Debit ($) | Credit($) | |
| Machinery (B) | 78,000 | ||
| Accumulated Depreciation (A) | 41,600 | ||
| Machinery (A) | 99,840 | ||
| Cash | 15,600 | ||
| Gain on Disposal Of machinery($ 62,400-($ 99,840 - $ 41,600) | 4,160 |
Pina.Inc's Books
| Account Titles and Explanation | Debit ($) | Credit($) | |
| Machinery (A) | 62,400 | ||
| Accumulated Depreciation (B) | 48,880 | ||
| Cash | 15,600 | ||
| Machinery (B) | 114,400 | ||
| Gain on Disposal Of machinery $78,000- ($ 114,400 - $ 48,880) | 12,480 |
2. Assuming exchange lacks commercial substance.
Ayayai Inc's Books
| Account Titles and Explanation | Debit ($) | Credit($) | |
| Machinery (B) | 73,840 | ||
| Accumulated Depreciation (A) | 41,600 | ||
| Machinery (A) | 99,840 | ||
| Cash | 15,600 |
When the exchange lacks commercial substance, Gain on disposal of machinery is not recorded.Instead it is reduced from the cost of the new asset .
Gain of Aiyayi Inc = $ 4,160
Asset value = Fair value of Asset B - Gain of Aiyayi
= $ 78,000 - $ 4,160 = $ 73,840
Pina.Inc's Books
| Account Titles and Explanation | Debit ($) | Credit($) | |
| Machinery (A) | 52,416 | ||
| Accumulated Depreciation (B) | 48,880 | ||
| Cash | 15,600 | ||
| Machinery (B) | 114,400 | ||
| Gain on Disposal Of machinery | 2,496 |
Workings:
Gain amount = 12,480
Cash realised as a percentage of consideration received = 15,600 / (62,400 + 15,600) = 20%
Gain to be recognized = 12,480 x 20% =$ 2,496
Gain to be deferred ( Reduced from cost of new machine) = $12,480 - $2,496 = $ 9,984
Cost of machinery (A) = $ 62,400 - $ 9,984 = $ 52,416
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