Question

Exercise 10-18

Pronghorn Company purchased an electric wax meter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

List price of new meter		$19,276
Cash paid		12,200
Cost of old meter (5-year life, $854 salvage value)		13,664
Accumulated Depreciation-old meter (straight-line)		7,686
Secondhand fair value of old meter		6,344

Prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Pronghorn’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

Answer:

Preparing Journal Entries Necessary to record this exchange, assuming that the exchange (a) has Commercial Substance:

Event	General Journal	Debit	Credit
a)	Exchange has commercial substance
	Depreciation Expense	$854
	Accumulated depreciation-Melter		$854
	(To record depreciation expense)
	($13664 - $854= $12810; $12810 / 5 = $2562; $2562× 4/12 = $854)
	Melter	$18544**
	Accumulated depreciation-Melter	$8540
	Melter		$13664
	Cash		$12200
	Gain on disposal of plant assets		$1220*
	(To record purchase and trade-in of Melter)

* Cost of Old Asset	$13664
Accumulated Depreciation ($7686+ $854)	($8540)
Book Value	$5124
Fair Market Value of Old Asset	($6344)
Gain (on disposal of plant asset)	$1220

** Cash Paid	$12200
FMV of old melter	$6344
Cost of New melter	$18544

(b) lacks commercial substance. Coronado’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016:

Event	General Journal	Debit	Credit
b)	Exchange lacks commercial substance
	Depreciation expense	$854
	Accumulated depreciation-Melter		$854
	(To record depreciation expense)
	Melter	$17324
	Accumulated depreciation-Melter	$8540
	Melter		$13664
	Cash		$12200
	(To record purchase and trade-in of Melter)