Question

Krasel Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was 90,000, and its accumulated depreciation at the date of exchange was 70,000. The asset received had a fair value of 50,000 and a book value of 45,000. The entry to record the transaction includes (Select all that apply.)

1) credit to equipment-old for 90,000.
2) credit to gain on exchange of asset for 30,000.
3) credit to equipment for 70,000.
4) debit to accumulated depreciation 70,000
5) debit to equipment-new for 50,000.
6) debit to equipment for 45,000.

Answer 1

The Krasel Corp. exchange transaction should include a debit to accumulated depreciation for $70,000, a debit to new equipment for $50,000, a credit to old equipment for $90,000, and a credit to the gain on exchange of asset for $30,000.

Step-by-step explanation:

Recording an Asset Exchange with Commercial Substance

To record the transaction where Krasel Corp. exchanges equipment, we should look at the book values and fair values given. First, the old equipment has a cost of $90,000 with accumulated depreciation of $70,000, thus its book value is the difference, $20,000. The new equipment has a fair value of $50,000 which is the amount recognizable on the exchange, regardless of its book value of $45,000.

The correct journal entries would be:

1. Debit to accumulated depreciation for $70,000 to remove the accumulated depreciation of the old equipment.
2. Debit to equipment (new) for $50,000 for the fair value of the new equipment received.
3. Credit to equipment (old) for $90,000 to remove the old equipment from the books.
4. Since the fair value of the new equipment is $50,000 and the book value of the old equipment was $20,000, we recognize a gain. Therefore, credit to gain on exchange of asset for $30,000.

The correct answers from the options provided are 1, 2, 4, and 5.