Question

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6/30/2015 2. (16 points) Rogers Co. had a sheet metal cutter that cost $120,000 on January 5, 2010. This old cutter had an estimated life of ten years and a salvage value of $20,000. On April 3, 2015, the old cutter is exchanged for a new cutter with a fair value of $60,000. The exchange lacked commercial substance. Rogers also received $15,000 cash. Assume that the last fiscal period ended on December 31, 2014, and that straight-line depreciation is used. Instructions (a) Show the calculation of the amount of the gain or loss to be recognized by Rogers Co. (b) Prepare all entries that are necessary on April 3, 2015.

Answer 1

a) Calculation of gain or loss on exchange

Cost of Metal Cutter on Jan.5, 2010 $120,000 Less: Depreciation Expense: Dec.31,2010. $10,000 Book Value, Jan.1,2011 $110,000 Less: Depreciation Expense: Dec.31,2011 $10,000 Book Value, Jan.1,2012 $100,000 Less: Depreciation Expense: Dec.31,2012. $10,000 Book Value, Jan.1,2013 $90,000 Less: Depreciation Expense: Dec.31,2013 $10,000 Book Value, Jan.1,2014 $80,000 Less: Depreciation Expense: Dec.31,2014 $10,000 Book Value, Jan.1,2015 $70,000 Less: Depreciation Expense: April 3, 2015 (10,0003/12) $2,500 Book Value, April.3, 2015 (old asset) $67,500 Book Value of Assets Given up : No Commercial substance $67,500 Gain or Loss (on exchange of old asset with new ) Nil Book Value of Assets Given up : 67,500 $67,500 Less: Cash Received    15,000 Fair Market Value of New Assets (cost of new equipment) $52,500

Straight Line Depreciation: Life of asset =10 years

Depreciation rate = 1 $\div$ 10 =10% or 0.10

Annual Depreciation Expense = (Book Value - Salvage value) $\times$ 10% =

= (120,000 - 20,000) $\times$ 10% = $10,000

2) Recording all entries necessary on 3 April 2015

Date	Account Tittle	Debit	Credit
2015
April 3	Depreciation Expense	$2,500
	Accumulated Depreciation- Equipment		$2,500
April 3	Accumulated Depreciation	52,500
	New Equipment- Sheet Cutter	52,500
	Cash	15,000
	Old Equipment-Sheet Cutter		120,000
	Old equipment exchanged with new and receipt of cash