Question

Caleb Co. owns a machine that had cost $42,400 with accumulated depreciation of $18,400. Caleb exchanges the machine for a newer model that has a market value of $52,000. 1. Record the exchange assuming Caleb paid $30,000 cash and the exchange has commercial substance. 2. Record the exchange assuming Caleb paid $22,000 cash and the exchange has commercial substance.

Answer 1

Answer: See explanation

Explanation:

1. Record the exchange assuming Caleb paid $30,000 cash and the exchange has commercial substance.

Dr Machine (new) $52000

Dr Loss on exchange of asset $2000

Dr Accumulated Depreciation $18400

Cr Equipment (Old) $42400

Cr Cash $30000

Nite that loss was calculated as:

= Market value of new machine - (Book value if old machine - Depreciation) - Cash paid

= $52000 - ($42400 - $18400) - $30000

= $52000 - $24000 - $30000

= -$2000

2. Record the exchange assuming Caleb paid $22,000 cash and the exchange has commercial substance

Dr Machine (new) $46000

Dr Accumulated Depreciation $18400

Cr Equipment (Old) $42400

Cr Cash $22000

Note that the value of the new machine was calculated as:

= Original cost + Cash paid - Accumulated Depreciation

= $42000 + $22000 - $18400

= $46000