Question

Part 1: On 9/1, a company trades a used piece of equipment for a new one. The old equipment was purchased for $100,000 and, on 10/1, accumulated depreciation was $70,000. A professional appraiser estimates the fair value of the old equipment to be $25,000. The company pays $6,000 cash in the transaction. Which of the following statements is correct?

A. On 9/1, a loss will be debited for $6,000

B. On 9/1, neither a loss nor a gain will be recorded

C. On 9/1, a loss will be debited for $5,000

D. On 9/1, a gain will be credited for $5,000

Part 2: On 9/1

1. Cash will be credited
2. Accumulated depreciation will be debited
3. A new asset account will be debited
4. All of the above
5. None of the above

Answer 1

Solution Part 1:

Book value of equipment sold = $100,000 - $70,000 = $30,000

Fair value of old equipment = $25,000

Loss on exchange = $30,000 - $25,000 = $5,000

On 9 /1 a loss will be debited for $5,000

Hence option C is correct.

Solution Part 2:

Cash will be credited, Accumulated depreciation will be debited and A new asset account will be debited to record exchange of old asset with new one.

Hence option d "All of the above" is correct.