Chapter 10, Problem 10.6P

To determine

Property, Plant, and Equipment:

Property, Plant, and Equipment refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

To Prepare: The journal entries to record the exchange on the books of Company S.

Explanation of Solution

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		140,000
	New Building		1,260,000
	Accumulated depreciation – Old building		1,200,000
	Old Building			2,000,000
	Gain on exchange of assets			600,000
	(To record the exchange on the books of R Company.)

Table (1)

Working note:

Determine the value of new building.

$\begin{array}{c}\text{Value of building = Fair value }\left(\text{Building}\right)-\text{Cash}\text{paid}\\ =\$1,400,000–\$140,000\\ =\$1,260,000\end{array}$

Determine the gain on exchange of assets.

$\begin{array}{c}\text{Gain on exchange of asset = }\left(\begin{array}{l}\left(\text{Fair value of Company S's asset}\right)\\ -\left(\begin{array}{l}\text{Original cost of Company S's}\text{asset}\\ -\text{ Accumulated depreciation}\end{array}\right)\end{array}\right)\\ =\left(\$1,400,000\right)–\left(\$2,000,000–\$1,200,000\right)\\ =\$1,400,000-\$800,000\\ =\$600,000\end{array}$

• Cash is an asset account, and increased. Therefore, debit Cash account with $140,000.
• New Building increases the asset account. Hence, debit New Equipment account with $1,260,000.
• Accumulated depreciation – old asset is a contra asset. It increases the value of asset account. Therefore, debit Accumulated Depreciation with $1,200,000.
• Old Building is an asset account, and decreased. Therefore, credit Old Equipment account with $2,000,000.
• Gain on sale of exchange of assets increases the equity by $10,000. Hence, credit Gain on sale of exchange of assets with $600,000.

Prepare the journal entries to record the exchange on the books of Company E.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	New Building		1,400,000
	Accumulated depreciation – Old Building		650,000
	Cash			140,000
	Old Building			1,600,000
	Gain on exchange of buildings			310,000
	(To record the exchange on the books of P Company.)

Table (2)

Working note:

Determine the value of new building.

$\begin{array}{c}\text{Value of building = Fair value }\left(\text{Building}\right)\text{+Cash}\text{paid}\\ =\$1,260,000+\$140,000\\ =\$1,400,000\end{array}$

Determine the gain on exchange of buildings.

$\begin{array}{c}\text{Gain on exchange of buildings = }\left(\begin{array}{l}\left(\text{Fair value of Company E's asset}\right)\\ -\left(\begin{array}{l}\text{Original cost of Company E's}\text{asset}\\ -\text{ Accumulated depreciation}\end{array}\right)\end{array}\right)\\ =\left(\$1,260,000\right)–\left(\$1,600,000–\$650,000\right)\\ =\$1,260,000-\$950,000\\ =\$310,000\end{array}$

• New Building increases the asset account. Hence, debit New Equipment account with $1,400,000.
• Accumulated depreciation – old asset is a contra asset. It increases the value of asset account. Therefore, debit Accumulated Depreciation with $650,000.
• Cash is an asset account and decreased. Therefore, credit Cash account with $140,000.
• Old Building is an asset account, and decreased. Therefore, credit Old Equipment account with $1,600,000.
• Gain on exchange of buildings increases the equity by $310,000. Hence, credit Gain on exchange of buildings with $310,000.