Question

Pearce Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was 120,000, and its accumulated depreciation at the date of exchange was40,000. The asset received had a fair value of 50,000 and a book value of32,000. What journal entries should be recorded?

1) Debit accumulated depreciation $40,000.
2) Debit loss on exchange $30,000.
3) Debit equipment-new $32,000.
4) Debit equipment-new $50,000.
5) Credit accumulated depreciation $40,000.
6) Credit equipment-old $80,000.
7) Credit equipment-old $120,000.

Answer 1

The correct journal entries for Pearce Corp. exchange of equipment with commercial substance involve debiting new equipment at fair value, debiting accumulated depreciation, and debiting a loss on exchange while crediting the old equipment at cost.

The question pertains to the accounting treatment for an exchange of equipment by Pearce Corp., where the transaction has commercial substance. From the details provided, we can determine the correct journal entries to record the transaction. The original cost of the old equipment was $120,000 with accumulated depreciation of $40,000, making its book value $80,000 ($120,000 - $40,000). The fair value of the new equipment received is $50,000, which is less than the book value of the old equipment.

The entries to record this transaction would be as follows:

• Debit Equipment - New $50,000
• Debit Accumulated Depreciation - Old Equipment $40,000

Debit Loss on Exchange $30,000 ($80,000 book value of old equipment - $50,000 fair value of new equipment)

• Credit Equipment - Old $120,000

These journal entries reflect the removal of the old equipment at cost, the recognition of the loss on exchange due to the decrease in value, and the recording of the new equipment at its fair value.