Question

Blue Company purchased equipment on January 2, 2016, for $105,700. The equipment had an estimated useful life of 5 years with an estimated salvage value of $13,200. Blue uses straight-line depreciation on all assets. On January 2, 2020, Blue exchanged this equipment plus $13,100 in cash for newer equipment. The old equipment has a fair value of $53,300.

Prepare the journal entry to record the exchange on the books of Blue Company. Assume that the exchange has commercial substance. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 2

Answer 1

Solution:

Working

Method to calculate depreciation under straight line method= (Cost of asset-salvage value)/ serviceable lifetime

$105,700-$13,200=$92,500

Accumulate depreciation= ($92,500/5)*4=$74,000 (From Jan 2016 to Jan 2020 is four years hence in the formula 4 is used)

Calculation for gain on disposal of equipment

Cost of old asset = $105,700

Less:Accumulated depreciation= $74,000

book value of equipment = $31,700

Less: Fair value of equipment = $53,300

Gain on disposal of equipment = $21,600

Calculation for cost of new asset

Cash paid = $13,100

Fair value of old equipment = $53,300

Cost of new assets = $66,400

Journal entry

Particular	Debit	credit
Accumulated depreciation-Old equipment A/c Dr	$74,000
New equipment A/c Dr	$66,400
Cash A/c Cr		$13,100
Old equipment A/c Cr		$105,700
Gain on disposal of equipment A/c Cr		$21,600
Total	140,400	140,400