Exchange of Similar Assets (Wong v. Chan)

Wong Company and Chan Company are in the same line of business; both companies manufacture sheet rock for single-family home construction. Both companies own a large piece of equipment used to prepare and cut the sheets at different lengths. The original cost and accumulated depreciation for each of the pieces of equipment is as follows.

Wong Equipment Chan Equipment

Record Cost $200,000 $170,000

Accumulated Depreciation 140,000 85,000

The CEOs for Wong Company and Chan Company have been friends for years. In the course of a conversation last week, they realized that the equipment that each of them owned was actually perfect for use by the other company. The CEOs agreed to exchange the pieces of equipment.

Record the journal entry for exchange of similar assets for each company. This material is based on the reading in Chapter 10.

Scenario #1

The fair value of the Wong equipment is $85,000 and the fair value of the Chan equipment is $75,000. Thus, in addition to exchange equipment, Chan must pay $10,000 cash to Wong. Assume this exchange has commercial substance.

WONG CHAN

Journal Entry Journal Entry

Scenario #2

The fair value of the Wong equipment is $85,000 and the fair value of the Chan equipment is $75,000. Thus, in addition to exchange equipment, Chan must pay $10,000 cash to Wong. The exchange lacks commercial substance and the $10,000 is assumed to be a small amount of cash.

WONG CHAN

Journal Entry