Question

(Nonmonetary Exchanges) On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde’s asset is referred to below as “Asset A,” and Wiggins’ is referred to as “Asset B.” The following facts pertain to these assets.

	Asset A	Asset B
Original cost	\(96,000	\)110,000
Accumulated depreciation (to date of exchange)	40,000	47,000
Fair value at date of exchange	60,000	75,000
Cash paid by Hyde, Inc.	15,000
Cash received by Wiggins, Inc.		15,000

Instructions

1. Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
2. Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.

Short answer

S.no.	Transaction	Hyde, Inc.’s	Wiggins, Inc.’s
(a)	Gain on Disposal of Machinery	$4,000	$12,000
(b)	Gain	$4,000	$2,400

Step-by-step solution

Meaning of Accumulated Depreciation

Accumulated depreciation refers to thetotal amount of depreciation charged on the assetsfrom the acquisition date to the reporting date.

(a) Preparing journal entry

In the books of Hyde, Inc.’s

Date	Particulars	Debit ($)	Credit ($)
	Machinery (B)	75,000
	Accumulated Depreciation-Machinery (A)	40,000
	Machinery (A)		96,000
	Gain on Disposal of Machinery		4,000
	Cash		15,000

Working notes:

Calculating gain on disposal of machinery

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{d}\mathit{i}\mathit{s}\mathit{p}\mathit{o}\mathit{s}\mathit{a}\mathit{l}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathit{r}\mathit{y}& \mathbf{=}& \mathit{F}\mathit{a}\mathit{i}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{-}\left(Originalcost-Accumulateddepreciation\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{-}\left(\$96,000-\$40,000\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{000}\\ & & \end{array}$

In the books of Wiggins, Inc.’s

Date	Particulars	Debit ($)	Credit ($)
	Cash	15,000
	Machinery (A)	60,000
	Accumulated Depreciation-Machinery (B)	47,000
	Machinery (B)		110,000
	Gain on Disposal of Machinery		12,000

Working notes:

Calculating gain on disposal of machinery

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{d}\mathit{i}\mathit{s}\mathit{p}\mathit{o}\mathit{s}\mathit{a}\mathit{l}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathit{r}\mathit{y}& \mathbf{=}& \mathit{F}\mathit{a}\mathit{i}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{-}\left(Originalcost-Accumulateddepreciation\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{75}\mathbf{,}\mathbf{000}\mathbf{-}\left(\$110,000-\$47,000\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{000}\\ & & \end{array}$

(b) Preparing journal entry

In the books of Hyde, Inc.’s

Date	Particulars	Debit ($)	Credit ($)
	Machinery (B)$\left(\$75,000-\$4,000\right)$	71,000
	Accumulated Depreciation-Machinery (A)	40,000
	Machinery (A)		96,000
	Cash		15,000

Working notes:

Computation of gain deferred

Fair value	$60,000
Less: Book value$\left(\$96,000-\$40,000\right)$	56,000
Gain deferred	$ 4,000

in the books of Wiggins, Inc.’s

Date	Particulars	Debit ($)	Credit ($)
	Cash	15,000
	Machinery (A)	50,400
	Accumulated Depreciation-Machinery (B)	47,000
	Machinery (B)		110,000
	Gain on Disposal of Machinery		2,400

Working notes:

Computation of total gain

The fair value of Asset B	$75,000
Less: Book value of Asset B	63,000
Gain on disposal of assets	$12,000

Calculation of gain recognized

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{g}\mathit{n}\mathit{i}\mathit{z}\mathit{e}\mathit{d}& \mathbf{=}& \frac{\mathbf{C}\mathbf{a}\mathbf{s}\mathbf{h}}{\mathbf{C}\mathbf{a}\mathbf{s}\mathbf{h}\mathbf{+}\mathbf{F}\mathbf{a}\mathbf{i}\mathbf{r}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}\mathbf{\times }\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{d}\mathit{i}\mathit{s}\mathit{p}\mathit{o}\mathit{s}\mathit{a}\mathit{l}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{400}\\ & & \end{array}$

Calculating basics of machinery A

The fair value of the asset acquired	$60,000
Less: Gain deferred$\left(\$12,000-\$2,400\right)$	9,600
Basis of Machinery A	$50,400

Note:Itexemplifies the relaxation of the no gain or loss rule for trades with low economic value. Although it is unusual for a business to be devoid of commercial substance when cash is received, profit can be derived based on a percentage of cash received at full fair value.