Question

Krasel Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was $90,000, and its accumulated depreciation at the date of exchange was $70,000. The asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries

A. credit to equipment-old for $90,000
B. credit to gain on exchange of asset for $30,000
C. debit to equipment-new for $50,000
D. debit to accumulated depreciation $70,000

Answer 1

all are included

• A. credit to equipment-old for $90,000
• B. credit to gain on exchange of asset for $30,000
• C. debit to equipment-new for $50,000
• D. debit to accumulated depreciation $70,000

Step-by-step explanation:

When a company exchanges assets in a transaction with commercial substance, they must use the fair market value of both assets to record the transactions.

In this case, the company must recognize a gain with this asset exchange. The journal entry should be:

Dr New equipment 50,000

Dr Accumulated depreciation old equipment 70,000

Cr Old equipment 90,000

Cr Gain on exchange 30,000

The gain on the exchange = value of new equipment + accumulated depreciation of old equipment - value of old equipment = $50,000 + $70,000 - $90,000 = $30,000

If the transaction lacked commercial substance, then the gain/loss recognized by the company would have resulted only after the new asset was monetized (i.e. sold).

Answer 2

All options are applicable

Step-by-step explanation:

Upon the exchange of the asset, the cost of the old asset needs to be removed from the asset account by crediting the old asset account with $90,000

On the other hand, the market value of the new asset needs to be debited to new asset account i.e$50,000 and also the accumulated depreciation must debited to accumulated depreciation account.

All in all, the difference between the credit and the debit entries is balancing credit as shown below

Dr New asset $50,000

Dr Accumulated depreciation $70,000

Cr Old asset $90,000

Cr gain on asset exchange(bal figure) $30,000