Question

Equipment that cost $412,900 and has accumulated depreciation of $324,200 is exchanged for equipment with a fair value of $160,000 and $40,000 cash is received. The exchange lacked commercial substance.

Calculate the gain to be recognized from the exchange.

Gain recognized

$

List of Accounts

  

  

Prepare the entry for the exchange. Show a check of the amount recorded for the new equipment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit

Answer 1

a. Book value of the equipment at the time of exchange

= Cost - Accumulated depreciation

= $412900-324200 = $88700

Value received for the equipment = Another equipment with fair value + cash

= $160,000 + $40,000 = $200,000

Gain on exchange = Value received - Book value of the equipment given

= $200000-88700 = $111300

Gain to be recognized = Gain x [ Cash received / Total value received ]

= $111300* (40000/200000) = $22260

b.

Account Titles and Explanation	Debit	Credit
Accumulated Depreciation - Equipment	324200
Equipment	70960
Cash	40000
Equipment		412900
Gain on Disposal of Equipment		22260