Question

Equipment that cost $600,000 and has accumulated depreciation of $475,000 is exchanged for equipment with a fair value of $240,000 and $60,000 cash is received. The exchange lacked commercial substance. A) Calculate the gain to be recognized from the exchange B) Prepare the entry for the exchange. Show a check of the amount recorded for the new equipment.

Answer 1

Solution: Calculation of gain to be recognized from the exchange:

Particulars	Amount ($)
Cost	600,000
Less: Accumulated depreciation	475,000
Book value	125,000
Fair value (240000+60000)	300,000
Gain (300000-125000)	175,000

Gain recognized = 175000*(60000/300000)

= $35,000

Following is the required journal entry:

Particulars	Debit ($)	Credit ($)
Accumulated depreciation	475,000
Equipment	100,000
Cash	60,000
Equipment		600,000
Gain on Disposal		35,000

Check:

Particulars	Amount ($)
Fair value	240,000
Less: Deferred gain	140,000
Basis of new equipment	100,000