During the current year, Garrison Construction ttaded in two relatively new small cranes (cranes no. 6RTand S79) for a larger crane that Garrison expects will be more useful for the particular contracts that the company has to fulfill over the next couple of years. The new crane is acquired from Pisani Manufacturing, which has agreed to take the smaller equipment as trade-ins and also pay $17,500 cash to Garrison. The new crane cost Pisani $165,000 to manufacture and is classified as inventory. The following information is available:

Instructions
(a) Assume that this exchange has commercial substance. Prepare the journal entries on the books of (1) Garrison Construction and (2) Pisani Manufacturing. Pisani uses a perpetual inventory system.
(b) Assume that this exchange lacks commercial substance. Prepare the journal entries on the books of (1) Garrison Construction and (2) Pisani Manufacturing. Pisani uses a perpetual inventory system.
(c) Assume that you have been asked to recommend whether it is more appropriate for the transaction to have commercial substance or not to have commercial substance. Develop arguments that you could present to the controllers of both Garrison Construction and Pisani Manufacturing to justify both alternatives. Which arguments are more persuasive?

Transcribed Image Text:

Garrison Const. $130,000 120,000 15,000 18,000 128,000 87,500 Pisani Mf Cost of crane #6RT Cost of crane #S79 Accumulated depreciation, #6RT Accumulated depreciation, #S79 Fair value, #GRT Fair value, #S79 Fair value of new crane Cash paid Cash received $185,000 17,500 17,500