Indigo Company exchanged equipment used in its manufacturing operations plus $3,960 in cash for similar equipment used in the operations of Sweet Company. The following information pertains to the exchange. Indigo Co. Sweet Co.
Equipment (cost) $36,960 $36,960
Accumulated depreciation 25,080 13,200
Fair value of equipment 16,500 20,460
Cash given up 3,960

Required:
a. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
b. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

A. Indigo Co

Dr Accumulated depreciation 25,080

Dr Equipment 15,840

Dr Equipment $36,960

Cr Cash 3,960

Sweet Co.

Dr Equipment 16,500

Dr Accumulated depreciation 13,200

Dr Cash 3960

Dr Loss on disposal of equipment 3,300

Cr Equipment $36,960

B. Indigo Complete

Dr Accumulated department 25,080

Dr Equiipment 20,460

Cr Equiipment $36,960

Cr Gain on disposal of equipment 78,540

Cr Cash 3,960

Sweet Co.

Dr Equiipment 16500

Dr Accumulated department 13200

Dr Cash 3960

Dr Loss on disposal of equipment 5660

Cr Equiipment 28,000

Explanation:

a. Preparation of the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.

Indigo Co

Dr Accumulated depreciation 25,080

Dr Equipment 15,840

[$36,960+3,960-25,080]

Dr Equipment $36,960

Cr Cash 3,960

Sweet Co.

Dr Equipment 16,500

Dr Accumulated depreciation 13,200

Dr Cash 3960

Dr Loss on disposal of equipment 3,300

[$36,960-(16,500+13,200+3960)

Cr Equipment $36,960

b. Preparation of the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

Indigo Complete

Dr Accumulated department 25,080

Dr Equiipment 20,460

Cr Equiipment $36,960

Cr Gain on disposal of equipment 78,540

[(25,080+20,460+$36,960)-3,960]

Cr Cash 3,960

Sweet Co.

Dr Equiipment 16500

Dr Accumulated department 13200

Dr Cash 3960

Dr Loss on disposal of equipment 5660

(16500+13200+3960-28,000)

Cr Equiipment 28,000

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