Question

1. On Feb 1 2019, ABC Co. traded in an old piece of equipment that originally cost $64,000 with a salvage value of $4000 and a useful life of 5 years for a new upgraded model that had a cash price of $80,000. The company uses straight-line depreciation and the original equipment was purchased on Feb 1, 2015.
A) Prepare the journal entry to record the exchange under the assumption that a $10,000 trade-in allowance was received and the balance was paid in cash. (B) Prepare the journal entry to record the exchange under the assumption that instead of a $10,000 trade-in allowance, a $15,000 trade-in allowance was received and the balance was paid in cash.

2. XYZ Co. Purchased a delivery van on January 1, 2000 for $80,000. At the time of purchased it was estimated that the van would be used for 8 years with a $20,000 trade-in value. On January 1, 2004 the company decided to revise the useful life to 10 years and revise the residual value to $15,000. Using straight-line depreciation, determine the book value on January 1, 2004 and the revised depreciation for 2004.

3. A, B, and C formed abc Consulting this year by making capital contributions of $250,000, $400,000, and $150,000, respectively. They anticipate annual loss of $200,000 and are considering the following alternative plans of sharing profits and losses:  
I. In the ratio of their initial investments; or
II. Salary allowances of $100,000 to A, $90,000 to B, and $50,000 to C and interest allowances of 15% on initial investments, with any remaining balance shared in the ratio of 3:2:1.  
Required:
1. Use the schedule to show how a loss of $200,000 would be distributed under each of the alternative plans being considered. (Round to the nearest dollar if needed.)

Answer 1

1.

Original Equipment Cost = 64,000

Salvage Value = 4,000

Use full life = 5 years

Depreciation = (64,000-4000)/5

= 12,000

Accumulated Depreciation after 4 years = 12,000*4

= 48,000

A) Trade in value is $10,000

Calculation of Gain or loss on Exchange

Cost of Equipment = $64,000

(-) Accumulated Depreciation = $48,000

Net Book Value = $16,000

(-) Trade in Value = ($10,000)

Loss on Exchange = $6,000

Journal Entry

Equipment $90,000

Accumulated Depreciation $48,000

Loss on Exchange of Equipment $6,000

To Equipment (old) 64,000

To Cash 80,000

B) If trade in value is 15,000

Calculation of Gain or loss on Exchange

Cost of Equipment = $64,000

(-) Accumulated Depreciation = $48,000

Net Book Value = $16,000

(-) Trade in Value = ($15,000)

Loss on Exchange = $1,000

Journal Entry

Equipment($80,000+$15,000) $95,000

Accumulated Depreciation $48,000

Loss on Exchange of Equipment $1,000

To Equipment (old) $64,000

To Cash $80,000

2.

Jan 1, 2000

Purchase = $80,000

Salvage value = $20,000

Estimated life = 8 years

Depreciation = ($80,000-$20,000)/8

= $7,500 per year

Book Value on Jan 1, 2004

Accumulated Depreciation = $7,500*4

= $30,000

Book Value = $80,000 - $30,000

= $50,000

Revised Depreciation for 2004

Revised life = 10 years

Balance life = 6 years

Salvage Value = $15,000

Therefore Depreciation = ($50,000-$15000)/6

= $5,833

3.

I) In the ratio of Initial Investments

Partners	Capital contributions	In the ratio of Investments
A	$   2,50,000.00	$           -55,556.00
B	$   4,00,000.00	$           -88,889.00
C	$   2,50,000.00	$           -55,556.00
Total	$   9,00,000.00	$       -2,00,001.00

II)

	A	B	C	Total
Salary Allowance	$   1,00,000.00	$            90,000.00	$     50,000.00	$ 2,40,000.00
Interest Allowance	$      37,500.00	$            60,000.00	$     37,500.00	$ 1,35,000.00
Sub Total	$   1,37,500.00	$         1,50,000.00	$     87,500.00	$ 3,75,000.00
Deficiency	$ -2,87,500.00	$        -1,91,667.00	$    -95,833.00	$ -5,75,000.00
Loss Allocation	$ -1,50,000.00	$           -41,667.00	$      -8,333.00	$-2,00,000.00