Question

Exercise 1

Pizza Company trades its used delivery cars for a new models at Hudson Toyota. The used cars have a book value of $60,000 (original cost $140,000 less $80,000 accumulated depreciation). The new cars have MSRP of $80,000. The fair value of the old cars based on estimation by third party is $50,000. After some negotiations between the Pizza Company and Hudson Toyota, the new cards would receive $10,000 discount and the trade in value of the old trucks in the amount of $55,000. The remaining portions is to be paid in cash.

Prepare the journal entries assuming a) commercial substance and b) no commercial substance.

Exercise 2:

On July 1, 2013, Pizza Company decided to trade-in their used equipment (ovens, refrigerators, ect.) for new models at Sears. The old equipment was initially purchased for $120,000 in January 2010. At that time, the useful life was determined to be 5 years. (The company uses the straight line to determine depreciation expense)

The new equipment has a listing price after all applicable discounts of $50,000. If company is to sell its old equipment to third party, they would realize $45,000 on average.

a. Prepare the journal entries assuming no commercial substance.

b. This time, there is no commercial substance and the company paid $10,000. Prepare the journal entry for the exchange!

c. This time, there is no commercial substance and the company received $10,000. Prepare the journal entry for the exchange!

Answer 1

ANSWER

Exercise 1

a)

The cost of new cars

MSRP of New Cars	80,000
Less Trade in Value + Discount Allowed on New Cars	65,000
Cash Payment Due	15,000
Fair Value of Old Cars	50,000
Cost of New Machine	65,000

____

The journal entry assuming commercial substance

Account Titles	Debit	Credit
Accumulated Depreciation – Old Cars	$80,000
New Cars	$65,000
Loss on Exchange (155,000 - 145,000)	$10,000
Cash (80,000 - 10,000 - 55,000)		$15,000
Old Cars		$140,000

_____

Part b)

The journal entry would be the same as in part a) as the loss on exchange is to be recognized immediately irrespective of whether the transactions has or lacks commercical substance. The journal entry

Account Titles	Debit	Credit
Accumulated Depreciation – Old Cars	$80,000
New Cars	$65,000
Loss on Exchange (155,000 - 145,000)	$10,000
Cash (80,000 - 10,000 - 55,000)		$15,000
Old Cars		$140,000

Exercise 2:

	($)
	Cost of old Equipment	1,20,000
	Annual depreciation ($ 120,000/5)	24,000
	Accumulated Depreciation till july 2013	84,000
	[($ 24,000 x 3 years )+ ($ 24,000 x 1/2)]
	Carrying amount of old equipment ($ 120,000 - $ 84,000)	36,000
	Journal entry for exchange of assets
a	This time, there is no commercial substance and the company paid $10,000
Date	Account tittle	Debit $	Credit $
2013
Jul-01	Accumulated Depreciation	84,000
	New Equipment (36,000 + 10,000)	46,000
	Old Equipment		1,20,000
	Cash		10,000
	(To be record exchange of old equipment with new asset by paying additional cash $ 10,000)
b	This time, there is no commercial substance and the company received $10,000.
Date	Account tittle	Debit $	Credit $
2013
Jul-01	Accumulated Depreciation	84,000
	New Equipment (Carrying amount)	36,000
	Cash	10,000
	Old Equipment		1,20,000
	Gain on exchange of equipment		10,000
	(To be record exchange of old equipment with new asset by receiving cash $ 10,000)

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