Question

1. 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 lacks commercial substance?

   		The journal entry to record the exchange will result in a gain of $6,800
   		The journal entry to record the exchange will result in a gain of $971.
   		The new fixed asset will be recorded with a cost of $105,000
   		The journal entry to record the exchange will result in a gain of $1,886.
   		The new fixed asset will be recorded with a cost of $98,200
   		The journal entry to record the exchange will result in a gain of $1,650.
   		The new fixed asset will be recorded with a cost of $90,000
   		The journal entry to record the exchange will result in a loss of $9,200.
   		The journal entry to record the exhange will result in a loss of $1,150.
   		The journal entry to record the exchange will result in a gain of $850

Answer 1

The asset costs 120,000 on May 1, 2020. As per double declining method of depreciation, the asset shall be depreciated at 20% (10% *2). Hence the value of asset as on 31 Dec, 2021 will be 83,200. Since the useful life is 10 years, the straight line rate of depreciation =100/10 =10%.

Calculations:

Year1: Depreciation =120,000 X 20% = 24,000

Closing value =120,000 - 24,000 =96,000 as on 30 Apr 2021.

Y2 depreciation (8 months) = 96,000 X 20% X 8/12 = 12,800

Closing value =96, 000 - 12,800 = 83,200. As on 31 Dec 2021.

This asset is exchanged for 90,000 with a cash payment of 15,000. Thus the journal entry will be as follows:

New asset Dr 90,000

P/L(loss) Dr 8,200[ balancing figure]

To old asset 83,200

To cash 15,000.

Thereby, the new fixed asset will be recorded at a cost of 90,000 having a loss of 8,200.