Question

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

Answer 1

• 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]