Vaughn Co. owns a machine that costs $48,000 with accumulated depreciation of $21,200. Vaughn exchanges the machine for a newer model that has a market value of $58,000. 1. Record the exchange assuming Vaughn paid $32,800 cash and the exchange has commercial substance. 2. Record the exchange assuming Vaughn pays $24,800 cash and the exchange lacks commercial substance.

Requirement 1

Loss on Exchange $ 1,600 (debit)

New Model $58,000 (debit)

Accumulated Depreciation - Old Model $21,200 (debit)

Cost - Old Model $48,000 (credit)

Cash $32,800 (credit)

Requirement 2

Loss on Exchange 24,800 (debit)

New Model $26,800 (debit)

Accumulated Depreciation - Old Model $21,200 (debit)

Cost - Old Model $48,000 (credit)

Cash 24,800 (credit)

Explanation:

Note : the exchange lacks commercial substance.

IAS 16 gives an exception on the measurement of Cost of Acquired asset when the transaction lacks commercial substance.

The Acquired Asset will be Measured at Carrying Amount of Asset given up. Otherwise the Acquired Asset would be measured at Fair Value of Asset given up of Fair Value of Asset Acquired.

Carrying Amount of Asset Given up = Cost - Accumulated Depreciation

= $48,000 - $21,200

= $26,800