Question

Company exchanged an old forklift with an original cost of $20,000, accumulated depreciation to date of $15,000, and a fair value of $6,000. The new forklift list price is $25,000. A trade-in allowance of $7,000 was given for the old forklift.

Which of the following is the correct journal entry to record the exchange?

Select one:

a. New Equipment 23,000

Accumulated Depreciation 15,000

Old Equipment 20,000

Cash 17,000

Gain on Disposal 1,000

b. New Equipment 38,000

Old Equipment 20,000

Cash 18,000

c. New Equipment 24,000

Accumulated Depreciation 15,000

Old Equipment 20,000

Gain on Disposal 1,000

Cash 18,000

d. New Equipment 23,000

Accumulated Depreciation 15,000

Equipment 20,000

Cash 18,000

Answer 1

Answer is (C)

Explanation:

New Equipment $24,000

Acc. Depreciation on old Equipment    $15,000

Old Equipment $20,000

Gain on Disposal $ 1,000

Cash $18,000

Working Note:

Cash Paid = Old equipment cost - trade-in-allowance

= $20,000 - $7,000 = $18,000

Cost of new equipment= Cash Paid + Fair Value of assest traded

= $18,000 + $6,000 = $24,000

There will ba a gain on disposal of $1,000 on the old equipment,calculated as follows:

Cost $ 20,000

Acc. Dep'n (15,000)

Carrying amount   5,000

Fair value (6,000)

Gain on disposal $ 1,000

Additional Information:

Trade-in-allowance is the value of trade on which the purchaser is ready to purchase and the seller is ready to sell the assets. The amount is applied to the new assets purchase price and the difference is paid by the buyer to the seller.