Final answer:
The accounting transaction for exchanging a vehicle involves debiting the Accumulated Depreciation for the old vehicle, recording a loss if necessary, and debiting the cost of the new vehicle, while crediting cash for the additional amount paid and crediting the old vehicle to remove it from the books.
Step-by-step explanation:
The question involves recording a transaction involving the exchange of a vehicle with accumulated depreciation and the provision of additional cash for a new vehicle.
This transaction falls under the accounting principles for exchanging non-monetary assets with commercial substance. When Keva Co. trades in a vehicle, it must remove the vehicle's cost and its accumulated depreciation from the books and recognize any gain or loss on the exchange. Here is the step-by-step breakdown of this transaction:
Remove the old vehicle from the books by debiting Accumulated Depreciation for $18,000, which eliminates the book value of the vehicle.
Recognize the loss on exchange, which is the difference between the book value of the old vehicle (original cost minus accumulated depreciation) and the cash paid, minus the list price of the new vehicle. In this case, the book value is $2,000 ($20,000 - $18,000), additionally with $24,000 cash provided; thus, the total amount given up is $26,000. Since the new vehicle costs $25,000, we record a loss of $1,000.
Record the new vehicle at its list price of $25,000, which is the fair value of the vehicle.
Account for the cash paid by debiting cash for $24,000.
To reflect this in journal entry form:
Vehicles would be debited for $25,000 to represent the new vehicle cost.
Loss on Exchange of Vehicles would be debited for $1,000.
Accumulated Depreciation - Vehicles would be debited for $18,000 to remove the old vehicle's accumulated depreciation from the books.
Cash would be credited for $24,000 to represent the cash paid out.
The old Vehicle account would be credited for $20,000 to remove it from the books.