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a. Exchange Has Commercial Substance

When an exchange has commercial substance, gains or losses are recognized immediately.However, defer this gain:**

  • Gain on exchange: $1,300

Adjust the cost of the new computer to defer the gain:

  • Cost of the computer without recognizing the gain: $3,300 - $1,300 = $2,000 (Deferred gain reduces the asset's recognized value)

Journal Entry:

  • Debit Computer: $2,000
  • Debit Accumulated Depreciation - Truck: $18,000
  • Credit Truck: $20,000
  • Credit Cash: $500

In both scenarios, the entries reflect the appropriate handling of gains based on whether the transaction impacts future cash flows (commercial substance) or not.


Original text

a. Exchange Has Commercial Substance


When an exchange has commercial substance, gains or losses are recognized immediately. Here's how to prepare the journal entry:


Calculate the book value of the truck:



  • Cost of the truck: $20,000

  • Accumulated Deprecation: $18,000

  • Book Value: $20,000 - $18,000 = $2,000


Determine the gain on the exchange:



  • Fair value of the received computer: $3,300

  • Book value of the truck: $2,000

  • Gain on exchange: $3,300 - $2,000 = $1,300


Journal Entry:



  • Debit Computer: $3,300

  • Debit Accumulated Depreciation - Truck: $18,000

  • Credit Truck: $20,000

  • Credit Cash: $500

  • Credit Gain on Disposal of Asset: $1,300


b. Exchange Lacks Commercial Substance


When the exchange lacks commercial substance, gains are deferred unless cash is received. In this scenario, no cash is received (cash is paid), so the gain is deferred:


Calculate the gain that would have been recognized if the exchange had commercial substance (same as above). However, defer this gain:



  • Gain on exchange: $1,300


Adjust the cost of the new computer to defer the gain:



  • Cost of the computer without recognizing the gain: $3,300 - $1,300 = $2,000 (Deferred gain reduces the asset’s recognized value)


Journal Entry:



  • Debit Computer: $2,000

  • Debit Accumulated Depreciation - Truck: $18,000

  • Credit Truck: $20,000

  • Credit Cash: $500


In both scenarios, the entries reflect the appropriate handling of gains based on whether the transaction impacts future cash flows (commercial substance) or not.


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