Question

When a company exchanges machinery and receives a trade-in allowance greater than the book value, this transaction would be recorded with the following entry (assuming the exchange was considered to have commercial substance)?
a. debit Cash and Machinery; credit Accumulated Depreciation and Machinery
b. debit Machinery and Accumulated Depreciation; credit Machinery, Cash, and Gain on Disposal
c. debit Cash and Machinery; credit Accumulated Depreciation
d. debit Machinery and Accumulated Depreciation; credit Machinery and Cash

Answer 1

Answer:

b. debit Machinery and Accumulated Depreciation; credit Machinery, Cash, and Gain on Disposal

Explanation:

When machinery exchange and its value is greater than the book value so the journal entry is recorded which is shown below:

Machinery A/c Dr XXXXX

Accumulated depreciation A/c Dr XXXXX

            To Machinery A/c XXXXX

            To Cash A/c XXXXX

            To Gain on disposal A/c XXXXX

(Being the exchange is recorded)

Hence the most appropriate option is b.