Question

Caleb Co. owns a machine that had cost $44,400 with accumulated depreciation of $19,400. Caleb exchanges the machine for a newer model that has a market value of $55,000. 1. Record the exchange assuming Caleb paid $31,000 cash and the exchange has commercial substance. 2. Record the exchange assuming Caleb paid $23,000 cash and the exchange has commercial substance.

Answer 1

Part 1

Debit :New Machine $55,000

Debit : Profit and Loss $39,400

Credit: Accumulated Depreciation: Old Machine $19,400

Credit :Cost: Old Machine $44,400

Credit : Cash $31,000

Part 2

Debit :New Machine $55,000

Debit : Profit and Loss $31,400

Credit: Accumulated Depreciation: Old Machine $19,400

Credit :Cost: Old Machine $44,400

Credit : Cash $23,000

Step-by-step explanation:

The Standard on Property, Plant and Equipment States that :

"When exchange has commercial substance, Cost Price of item Acquired is measured at Fair Value.

When Fair Values of both assets acquired and given up can be determined reliably, the Fair Value of Asset given up will be used.

Unless the Fair Value of the Asset acquired is more evident, that Value may be used"

From this, we have on Fair Value of Asset Acquired, so we use that as the Cost of the New Asset. Cost of New Asset in Both Cases will be $55,000.

Recognize the New Cost of Asset, Derecognize the Cash Paid, Derecognize Cost of Old Asset and Accumulated Depreciation in a journal to find the Profit or loss resulting from the exchange as above.