Question

Coronado Co. had a sheet metal cutter that cost $115,000 on January 5, 2016. This old cutter had an estimated life of ten years and a salvage value of $20,000. On April 3, 2021, the old cutter is exchanged for a new cutter with a fair value of $60,000. The exchange lacked commercial substance. Coronado also received $15,000 cash. Assume that the last fiscal period ended on December 31, 2020, and that straight-line depreciation is used.

Required:
(a) Show the calculation of the amount of the gain or loss to be recognized by Coronado Co.
(b) Prepare all entries that are necessary on April 3, 2021.

Answer 1

a. Gain = $9,875

b. The Journal entry is shown below:-

Explanation:

a. The computation of amount of the gain or loss to be recognized by Coronado Co. is shown below:-

For computing the gain or loss first we need to follow some steps which is here below:-

Depreciation per year under SLM = (Cost of the asset - Salvage value) ÷ Life of the asset

= ($115,000 - $20,000) ÷ 10

= $95,000 ÷ 10

= $9,500

Depreciation from 2016 to 2020 = Depreciation per year under SLM × 5 years

= $9,500 × 5

= $47,500

Here, the machine is sold on April 3 2021 .So we will compute the 3 month depreciation for 2021

Depreciation for 2021 = Depreciation per year under SLM × 3 months ÷ Number of months in a year

= $9,500 × 3 ÷ 12

= $2,375

Accumulated Depreciation = Depreciation from 2016 to 2020 + Depreciation for 2021

= $47,500 + $2,375

= $49,875

Book value = Costs - Accumulated Depreciation

= $115,000 - $49,875

= $65,125

Fair value = $60,000 + $15,000

= $75,000

Gain = Fair value - Book value

= $75,000 - $65,125

= $9,875

b. The Journal entry is shown below:-

1. Depreciation expenses Dr, $2,375

($9,500 × 3 ÷ 12)

To accumulated depreciation $2,375

(Being depreciation is recorded)

2. Cash Dr, $15,000

Machinery Dr, $60,000

Accumulated depreciation Dr, $49,875

To Machinery $115,000

To Gain on disposal $9,875

(Being Old equipment exchanged with new and receipt of cash is recorded)