Question

Obssuth Company is trading in its old computer system for an ERP system. The old system is on the books at a cost of $1,270,000 with accumulated depreciation of $885,000. The ERP has a price of $4,500,000 installed and debugged, but the manufacturer has agreed to reduce this amount by $250,000 in return for Obssuth's old system. Prepare the journal entry to record the acquisition of the new ERP system.

Answer 1

To record the acquisition of the new ERP system, debit the Computer Equipment account for the net cost of the ERP after deducting the trade-in allowance, credit Accumulated Depreciation, and the Computer System account for the old system's values, and adjust for any loss or gain on disposal.

Step-by-step explanation:

The journal entry to record the acquisition of a new ERP system by the Obssuth Company would involve several accounts. To illustrate:

• Debit the Computer Equipment account for the new ERP system's cost after taking into account the trade-in allowance.
• Credit the Accumulated Depreciation account for the old system to remove it from the books.
• Credit the Computer System account for the book value of the old system.
• Debit the Loss on Disposal account if there is a loss or credit the Gain on Disposal account if there is a gain.

Here is how the journal entry would look considering the given figures:

1. Debit Computer Equipment $4,250,000 ($4,500,000 new system cost - $250,000 trade-in allowance)
2. Credit Accumulated Depreciation - Computer Equipment $885,000
3. Credit Computer System $1,270,000
4. If there is a remaining book value after removing the accumulated depreciation, it is a loss which should be debited to Loss on Disposal of Computer System

These entries will ensure that the old system is properly removed from the company's books and that the cost of the new ERP system is accurately recorded.