Question

Oriole Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

List price of new melter		$18,328
Cash paid		11,600
Cost of old melter (5-year life, $812 salvage value)		12,992
Accumulated Depreciation-old melter (straight-line)		7,308
Secondhand fair value of old melter		6,032

Prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Oriole’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Account Titles and Explanation	Debit	Credit
(a)	Exchange has commercial substance:
	(To record current depreciation.)
	(To record exchange of the equipment.)
(b)	Exchange lacks commercial substance:
	(To record current depreciation.)
	(To record exchange of the equipment.)

Answer 1

Answer
(a) Exchange has commercial substance
Date	Account Title and Explanation	Debit	Credit
April 30, 2020	Depreciation Expense	$          812
	Accumulated Depreciation - Old melter		$          812
	(12992 - 812)/ 5 x 4/12
	(To record current depreciation)
April 30, 2020	Accumulated Depreciation - Old melter ($7308 + $812)	$       8,120
	Equipment - New melter (6032 + 11600)	$     17,632
	Gain on exchange		$       1,160
	Cash		$     11,600
	Equipment - Old melter		$     12,992
	(To record exchange of equipment)

(b) Exchange lacks commercial substance
Date	Account Title and Explanation	Debit	Credit
April 30, 2020	Depreciation Expense	$          812
	Accumulated Depreciation - Old melter		$          812
	(12992 - 812)/ 5 x 4/12
	(To record current depreciation)
	Accumulated Depreciation - Old melter ($7308 + $812)	$       8,120
	Equipment - New melter (12992 - 8120 + 11600)	$     16,472
	Cash		$     11,600
	Equipment - Old melter		$     12,992
	(To record exchange of equipment)
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