Question

The following information will be used for 3 questions on the exam:

Bridge Four Corporation purchase equipment for $120,000 on May 1, 2020. Bridge Four depreciates the equipment over 10 years using the double declining balance method of depreciation. Bridge Four estimates the equipment will have a salvage value of $5,000 at the end of the useful life. On December 31, 2021, Bridge Four entered into a transaction to exchange the equipment with another company. At the time of the exchange, the old equipment has an estimated fair market value of $90,000 and Bridge Four paid cash of $15,000.

Which of the following statements is true if the exchange has commercial substance?

		The exchange will result in a gain of $13,200.
		The journal entry to record the exchange will not include a gain or a loss.
		The new fixed asset will be recorded at $105,000.
		The exchange will result in a loss of $9,200.
		None of the other answer choices is correct.

Answer 1

The new fixed asset will be recorded at $105,000
Working
Double Declining Balance Method
Year	Book Value year start	Depreciation Rate	Depreciation Exp.	Acc. Dep	Book Value year end
2020	$120,000	13.33%	$16,000	$16,000	$104,000
2021	$104,000	20.00%	$20,800	$36,800	$83,200
Fair Value	$90,000
Less: Book Value	$83,200
Gain	$6,800
General Journal	Debit	Credit
Equipment (new)	$105,000		(Balance figure)
Accumulated Depreciation	$36,800
Equipment (old)		$120,000
Cash		$15,000
Gain on Exchange		$6,800