(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.

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

In the books of Hyde, Inc.’s

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

Working notes:

Calculating gain on disposal of machinery

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

In the books of Hyde, Inc.’s

Working notes:

Computation of gain deferred

in the books of Wiggins, Inc.’s

Working notes:

Computation of total gain

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

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.