Question

A company recently traded in an older model of equipment for a new model. The old model’s book value was $189,000 (original cost of $419,000 less $230,000 in accumulated depreciation) and its fair value was $210,000. The company paid $61,000 to complete the exchange which has commercial substance. Required: Prepare the journal entry to record the exchange.

Answer 1

The journal entry to record the exchange is:

• Debit Equipment (new) $271,000
• Credit Equipment (old) $189,000
• Credit Cash $61,000
• Debit Gain on Exchange $21,000

Breakdown:

• Old Equipment's fair value is $210,000
• Cash paid $61,000
• Book value of old equipment $189,000.

Step-by-step explanation:

To record the exchange of the equipment, we need to account for the removal of the old equipment, recognition of the new equipment, and cash paid.

The old equipment is removed at its book value, and the new equipment is recognized at its fair value plus any additional cash paid.

Here's how to record the journal entry:

• Debit Equipment (new) $271,000
• Credit Equipment (old) $189,000
• Credit Cash $61,000
• Debit Gain on Exchange $21,000

Breakdown:

• Old Equipment's fair value is $210,000
• Cash paid $61,000
• Book value of old equipment $189,000

The gain on exchange is calculated as the fair value of the old equipment ($210,000) less its book value ($189,000), resulting in $21,000.

The new equipment's value is the fair value of the old equipment ($210,000) plus the cash paid ($61,000), which equals $271,000.