Question

Metro Company trades its used machine for a new model at Denver Solutions Inc.

The used machine has a book value of $8,000 (original cost of $12,000, accumulated depreciation of $4,000) and a fair value of $6,000.

The new model lists for $16,000.

Denver gives Metro a trade-in allowance of $9,000 for the used machine.

Prepare a journal entry for Metro, assuming no commercial substance.

Answer 1

Cost of new machine:

= List price of new machine - Trade allowance + Fair value of old machine

= $16,000 - $9,000 + $6,000

= $13,000

Therefore, the journal entry is as follows:

Cost of new machine A/c Dr. $13,000

Accumulated depreciation (Book Value) A/c Dr. $4,000

Loss on exchange of machine A/c Dr. $2,000

To Old Machine (Book Value) $12,000

To Cash (16,000 - 9,000) $7,000

(To record the machine exchange)