8. (8 points) This machinery was acquired
by trading in used machinery. Facts concerning the trade-in are as
follows. Cost of machinery traded (old machine) $100,000
Accumulated depreciation to date of sale (old machine) 40,000 Fair
value of machinery traded (old machine) 83,000 Cash received 12,000
Fair value of machinery acquired (new machine) 71,000 Record the
journal entry for the above nonmonetary asset exchange for the
following scenarios: a. The transaction has commercial substance.
b. The transaction lacks commercial substance
Homework Answers
ANSWER:
Carrying value of the asset given up = Cost - Accumulated depreciation
= $100,000 - $40,000
= $60,000
Gain /loss = Fair value of the asset given up - Carrying value of the asset given up
= $83,000 - $60,000
= $23,000
(a).
| Machinery (new) (plug) | $71,000 | |
| Cash received | $12,000 | |
| Accumulated depreciation | $40,000 | |
| Machinery (old) | $100,000 | |
| Gain | $23,000 |
(b).
As the transaction lacks commercial substance, part of realized gain is recognized.
Percentage of boot = Cash received / (Fair value of asset received + Cash received)
= $12,000 / ($71,000 + $12,000)
= 14.46%
Realized gain = $23,000 * 14.46%
= 3,326
| Machinery (new) | $51,326 | |
| Cash received | $12,000 | |
| Accumulated depreciation | $40,000 | |
| Machinery (old) | $100,000 | |
| Gain | $3,326 |
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