Question

Wall Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $100,000, and its accumulated depreciation at the date of exchange was $60,000. The new asset received had a fair value of $80,000 and a book value of $65,000. The journal entry to record this exchange will include which of the following entries?

a) Debit equipment $80,000, Credit equipment $80,000
b) Credit accumulated depreciation $60,000, Debit accumulated depreciation $60,000
c) Credit gain on exchange of asset $40,000, Debit equipment $65,000
d) Debit equipment $100,000, Credit equipment $65,000

Answer 1

The correct journal entry for Wall Corporation exchanging old equipment for new equipment is not listed in the provided options. The entry should record the new equipment at its fair value and remove the old equipment's original cost and its accumulated depreciation, recognizing any gain on the exchange.

Step-by-step explanation:

The question asks about the journal entry required to record an exchange of equipment by Wall Corporation. The original cost of the old equipment was $100,000, with accumulated depreciation of $60,000. The new equipment has a fair value of $80,000 and a book value of $65,000.

The correct journal entry for recording this exchange is not provided in the options given. When equipment is exchanged, the entry typically requires removal of the old equipment at its original cost, recognition of any accumulated depreciation, and recording of the new equipment at its fair value. Any gain or loss on the exchange would be calculated as the difference between the fair value of the received equipment and the book value (original cost minus accumulated depreciation) of the given-up equipment.

In this case, the book value of the old equipment is $100,000 (original cost) - $60,000 (accumulated depreciation) = $40,000. Since the fair value of the new equipment is $80,000, the journal entry should include a debit to Equipment for $80,000, a credit to Accumulated Depreciation for $60,000, a credit to Old Equipment at its original cost of $100,000, and a credit to Gain on Exchange of Asset for $40,000 (which is the fair value of the new equipment of $80,000 less the book value of the old equipment of $40,000).