Question

(Nonmonetary Exchange) Carver Inc. recently replaced a piece of automatic equipment at a net price of $4,000, f.o.b. factory. The replacement was necessary because one of Carver's employees had accidentally backed his truck into Carver's original equipment and made it inoperable. Because of the accident, the equipment had no resale value to anyone and had to be scrapped. Carver's insurance policy provided for a replacement of its equipment and paid the price of the new equipment directly to the new equipment manufacturer, minus the deductible amount paid to the manufacturer by Carver. The $4,000 that Carver paid was the amount of the deductible that it has to pay on any single claim on its insurance policy. The new equipment represents the same value in use to Carver. The used equipment had originally cost $65,000. It had a book value of $45,000 at the time of the accident and a second-hand market value of $50,800 before the accident, based on recent transactions involving similar equipment. Freight and installation charges for the new equipment cost Carver an additional $1,100 cash.

Instructions

a. Prepare the general journal entry to record the transaction to replace the equipment that was destroyed in the accident.

b. Repeat part (a), but assume that the new equipment will result in significant savings to Carver, since the new equipment is more efficient and requires less staff time to operate.

Answer 1