Question

On January 1, 2013, Pastel Colors Corporation purchased drilling equipment for $11,500. The equipment has an estimated useful life of four years and a salvage value of $200.

Assuming that Pastel Colors uses the straight-line method of depreciation, if it trades the equipment for new equipment with a list price of $15,500 on December 31, 2014, and pays $4,050 in the exchange, assuming the exchange lacks commercial substance, the new equipment should be recorded at:

a) $15,500. b) $11,450. c) $9,850. d) $9,900.

Answer 1

$9,900

Step-by-step explanation:

For computing the new equipment in case of lacking commercial substance

Cost of the equipment as on Jan 1, 2013 $11,500

Less: Salvage Value $200

Depreciable Value $11,300

Useful Life 4 years

Depreciation per year is

= $11300 ÷ 4

= $2,825

Now the written down value as on Dec 31,2014 is

= $11,500 - $2,825 - $2,825

= $5,850

And, List price of new equipment is $15,500

So, the new equipment should be recorded at

= $4,050 + $5,850

= $9,900