You have two clients who are considering trading machinery with each other. Although the machines are different from each other, you believe that the exchange lacks commercial substance for the purposes of recording a nonmonetary exchange. Your clients would prefer that the exchanges be considered to have commercial substance, to allow them to record gains. Here are the facts.

Instructions

(a) Record the trade-in on Client A’s books assuming the exchange has commercial substance.

(b) Record the trade-in on Client A’s books assuming the exchange lacks commercial substance.

(c) Write a memo to the controller of Company A indicating and explaining the dollar impact on current and future statements of treating the exchange as having versus lacking commercial substance.

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

(e) Record the entry on Client B’s books assuming the exchange lacks commercial substance.

(f) Write a memo to the controller of Company B indicating and explaining the dollar impact on current and future statements of treating the exchange as having versus lacking commercial substance.

Transcribed Image Text:

Original cost Accumulated depreciation Market value Cash received (paid) Client A $100,000 40,000 95,000 (30,000) Client B $150,000 80,000 125,000 30,000