Question

Cedric Company recently traded in an older model computer for a new model. The old model’s book value was $180,000 (original cost of $400,000 less $220,000 in accumulated depreciation) and its fair value was $200,000. Cedric paid $60,000 to complete the exchange which has commercial substance.

Required:

Prepare the journal entry to record the exchange.

Answer 1

Cedric Company traded in an older model computer for a new model. This is the exchange of assets and gain or loss is the difference between fair value and book value of the asset given in this transaction. Journal entry for recording this transaction will be as under:

Preparing journal entry to record the exchange:

Date	Account title with explanation	LF	Debit ($)	Credit ($)
2011	Computer -New Model		2,60,000
	Accumulated Depreciation		2,20,000
	Gain on Computer -old computer			20,000
	Computer old Model			4,00,000
	Cash			30,000
	To record the exchange of computer

Working:

Calculation of gain/loss on disposal:

If the fair value exceeds the book value, it is called gain, on other hand book value exceeds the fair value is called “Loss”.

Cost of Acquisition of new computer.