Question

Lea Company decided to exchange its equipment for a new one on March 10, 2020. The equipment had a cost of $25,000 and its accumulated depreciation at the disposal date was $19,000. To get the new equipment; the company paid $10,000 cash. The fair value of the old equipment is $4,500.

What is the cost of the new equipment? *

a-$10,000

b-$14,500

c-$16,000

d-None of the above

Did the exchange of the equipment results a gain or loss? In what amount? *

a-Gain $1,500

b-Loss $1,500

c-Gain $4,500

d-Loss $4,500

The exchange entry of the equipment will include a: *

a-Debit old equipment $14,500

b-Credit Cash $1,000

c-Credit gain $1,500

d-None of the above

Answer 1

1. Cost of the new equipment = Fair value of old equipment + Cash paid = $4,500 + $10,000 = $14,500

Answer is b-$14,500

2. The exchange of the equipment results in a loss and the loss is the balancing amount in the following exchange entry:

Accumulated depreciation Dr $19,000

Loss. Dr. $1,500

New Equipment Dr. $14,500

To Cash $10,000

To Old Equipment $25,000

(To record the exchange entry and the balancing loss)

Answer is b-Loss $1,500

3. The exchange entry of the equipment will include the above items, which do not match with the options.

Answer is d-None of the above