Question

A fixed asset with a cost of $29,963 and accumulated depreciation of $26,967 is traded for a similar asset priced at $45,453 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $5,701, at what cost will the new equipment be recorded in the books

Answer 1

To calculate the recorded cost of the new equipment, subtract the trade-in allowance from the fair market value of the new asset, and then add the book value of the traded-in asset. The final recorded cost of the new equipment is $42,748.

Step-by-step explanation:

The new equipment cost is recorded by taking into account the trade-in allowance, the fair market value of the new asset, and the book value of the old asset. The book value of the old asset is calculated by subtracting the accumulated depreciation from the original cost, which in this case is $29,963 - $26,967 = $2,996. The trade-in allowance is $5,701, so the difference that needs to be paid for the new asset is $45,453 - $5,701 = $39,752.

However, since the old equipment has some remaining book value, we must account for this in our calculation. The new cost becomes $39,752 (the amount after trade-in) plus $2,996 (the remaining book value of the old equipment), resulting in a recorded cost of $42,748 for the new equipment.