Question

# Spencer traded its old machine for a newer model on January 1, 2020. The old machine...

Spencer traded its old machine for a newer model on January 1, 2020. The old machine was purchased on January 1, 2016 at a cost of \$ 30,000 and had accumulated depreciation of \$ 22,000. The estimated fair value of the old machine was \$ 4,000. The new machine was listed at \$ 50,000 but Spencer received a trade-in allowance for the old machine of \$ 8,000, so they had to pay \$ 42,000 in the exchange. Calculate the cost of the new machine and the gain or loss reported on Spencer's books related to the exchange. Assume the exchange had commercial substance.

A: New machine cost = \$46,000, loss of \$4,000

B: new machine cost = \$42,000, loss of 4,000

C: New machine cost = 50,000, gain of 4,000

D: new machine cost = 50,000, no gain or loss

• Correct Answer = Option ‘A’
New machine cost \$ 46000
Loss of \$ 4000
 HAS Commercial Substance Accounts title Debit Credit Working Equipment (new) \$46,000 [\$ 4000 Fair Value of old Equipment + Cash paid \$ 42000] Accumulated Depreciation \$22,000 [Of Old Equipment] Loss on exchange \$4,000 [Balancing amount] Equipment (Old) \$30,000 [Cost of old Equipment] Cash \$42,000 [Cash paid]

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