Question

1. On January 5, 2015, Mountain View Company purchased construction equipment for $702,700, with a useful life of six years and estimated salvage value of $94,000. The company uses the straight-line method of depreciation. On July 3, 2019, this equipment was traded for new similar construction equipment that has a value of $800,000. The company paid $588,000 cash and was given a trade-in allowance of $212,000 for the old equipment.

2. Assume the same facts as stated above, except that Mountain View paid cash of $521,650 on the trade-in and was given an allowance of $278,350 for the old equipment.

(Note: The presentation in the text related to the exchanges of assets has been superseded by FAS 153. Under FAS 153, gains and losses on the exchange of assets that have commercial substance are recognized in full. The deferral of gains (by reducing the basis in the new asset) only pertains to assets that lack commercial substance.)

1&2. Prepare the general journal entry needed on July 3, 2019, to record the trade-in. (Assume that the entry to bring depreciation up to date has been made.)

Journal entry worksheet Record the exchange assuming that the company paid $588,000 cash and was given a trade-in allowance of $212,000 for the old equipment. Note: Enter debits before credits. General Journal Debit Credit Date July 03, 2019

All information is provided above.

Answer 1

1. Here Old Equipment value is $702,700 and Salvage Value is $94,000 as on 5 Jan 2015 and estimated life of assets is 6 years

Hence Depreciation per year under straight line method = ($702,700-$94,000)/6 =$101,450.

New equipment was purchased on 3rd July 2019 and exchange the old equipment in a trade allowance of $212,000, hence old equipment had been used for 4 years and 6 months ( 5th Jan 2015 to 3rd July 2019) ,

Hence Depreciation for 4 years and 6 months is ($101,450 +($101,450/2)=$456,525.

So Equipment value as on 3rd July 2019 = ($702,700-$456,525)=$246,175

Hence Loss on exchange of Equipment = ($246,175-$212,000)=$34,175.

Hence Journal Entry would be

1.

General Journal	Debit	Credit
Equipment A/c (New)	$800,000
Accumulated Depreciation A/c	$456,525
Loss on Exchange A/c	$34,175
Equipment A/c (Old)		$702,700
Cash A/c		$588,000

2.

Here Old Equipment value is $702,700 and Salvage Value is $94,000 as on 5 Jan 2015 and estimated life of assets is 6 years

Hence Depreciation per year under straight line method = ($702,700-$94,000)/6 =$101,450.

New equipment was purchased on 3rd July 2019 and exchange the old equipment in a trade allowance of $278,350, hence old equipment had been used for 4 years and 6 months ( 5th Jan 2015 to 3rd July 2019) ,

Hence Depreciation for 4 years and 6 months is ($101,450 +($101,450/2)=$456,525.

So Equipment value as on 3rd July 2019 = ($702,700-$456,525)=$246,175

Hence Profit exchange of Equipment = ($278,350-$246,175)=$32175.

Hence Journal Entry would be

General Journal	Debit	Credit
Equipment A/c (New)	800000
Accumulated Depreciation A/c	456525
Gain on Exchange A/c		32175
Equipment A/c (Old)		702700
Cash A/c		521650