Question

Pearce Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $50,000 and a book value of $32,000. The journal entry to record this exchange will include which of the following entries?

Debit equipment $50,000
Debit loss on exchange $30,000
Credit equipment $120,000
Debit accumulated depreciation $40,000

Answer 1

It should include all the options, assuming that the debit on equipment account is for the new equipment, while the credit is for the old equipment.

• Debit equipment $50,000
• Debit loss on exchange $30,000
• Credit equipment $120,000
• Debit accumulated depreciation $40,000

Step-by-step explanation:

original purchase price $120,000

accumulated depreciation $40,000

book value $80,000

price of "new" equipment $50,000

with a book value of $32,000

if we assume that this transaction has commercial value, then we must use the fair market value of the "new" equipment in our journal entry:

Dr Accumulated depreciation - equipment: old 40,000

Dr Equipment: new 50,000

Dr Loss on exchange 30,000

Cr Equipment: old 120,000

If the transaction lacked commercial substance, then the journal entry would be different:

Dr Accumulated depreciation - equipment: old 40,000

Dr Equipment: new 80,000

Cr Equipment: old 120,000