Question

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1. In a transaction with commercial substance, April Co. exchanged an old machine costing $19.800 with Accumulated Depreciation of $10,400 for a new machine with a market value of $19,100 and a cash payment of $6,010.

1. What is the book value of the old machine? What is the recognized gain on the exchange?
2. Provide a journal entry to record the exchange.

Assume that in the scenario in Concept Chest 8 the cash payment was $10,800.

3. What is the loss on the exchange?
4. Provide a journal entry to record the exchange.

Answer 1

a) Book value = Cost of Asset - Accumulated Depreciation.

Book value = 19800-10400

= $ 9400

Gain/loss on exchange = Value of new asset - value of old asset - cash payment, if any

Gain/loss = 19100-6010-9400

= $ 3690

Gain on exchange is $3690

b) Journal Entry

~ Transfer of accumulated depreciation into machine account

Accumulated Depreciation A/c. Dr. 10400

To Old Machine A/c. 10400

~ Exchange of machine

New Machine A/c. Dr. 19100

To Old Machine A/c 9400

To Cash A/c 6010

To Gain on Exchange. 3690

Scenario 2

a) Loss in exchange = 19100-9400-10800

= $ 700 (-)

Loss is $700

b) Journal entry

~ Accumulated Depreciation

Same as above

~ Exchange of Assets

New Machine A/c. Dr. 19100

Loss on Exchange Dr. 700

To Old Machine A/c 9400

To Cash A/c 10400

- The End

Happy Reading✌️

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