Question

On January 1, 2010, the Felix Company purchased a machine to use in the manufacture of its product. The invoice cost of the machine was $260,000. At the time of acquisition, the machine had an original estimated useful life of 10 years and an estimated salvage value of $20,000. Annual depreciation was recorded at $24,000 per year. The machine was depreciated using the straight-line method.

On August 1, 2015, Felix exchanged the old machine for a newer model. The new machine had a fair market value of $200,000. The estimated fair value of the old machine was $150,000. Felix also paid $50,000 as part of the exchange transaction.

The old machine was depreciated on Felix’s books up through December 31, 2014.

Required

a. Bring Felix’s depreciation on this machine up to date through the date of the exchange.

b. Prepare the journal entry on August 1, 2015 to record the exchange assuming that

1) the exchange transaction had commercial substance.

2) the exchange transaction lacked commercial substance.

Answer 1

The Answer to this question is attached by hand written solutions.