#2. You have a client that is considering trading machinery with another company. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your client would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:

Your Client Other Company

Original cost $150,000 $100,000

Accumulated depreciation 80,000 40,000

Fair value 100,000 80,000

Cash received (paid) 20,000 (20,000)

Record the entry on your clients books assuming the exchange LACKS commercial substance. Then discuss what the financial statement effects would be of treating the exchange as having, versus lacking, commercial substance.