Question

Pearl Company purchased an electric wax melter 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 melter		$20,540
Cash paid		13,000
Cost of old melter (5-year life, $910 salvage value)		14,560
Accumulated Depreciation-old melter (straight-line)		8,190
Secondhand fair value of old melter		6,760

Prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Pearl’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016.

a. to record current depcreciation

to record exchange of equipment

b. to record current depreciation

to record exchange of euipment

Answer 1

Solution:
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	$910
	Accumulated depreciation-Melter		$910
	(To record depreciation expense)
	($14560 - $910 = $13,650;
	$13,650 / 5 = $2730;
	$2730 × 4/12 = $910)
	Melter	$19,760**
	Accumulated depreciation-Melter	$9,100
	Melter		$14,450
	Cash		$13.000
	Gain on disposal of plant assets		$1,410*
	(To record purchase and trade-in of Melter)

* Cost of Old Asset	$14,450
Accumulated Depreciation ($8,190 + $910)	($9,100)
Book Value	$6,049
Fair Market Value of Old Asset	($6,760)
Gain (on disposal of plant asset)	$1,410

** Cash Paid	$13,000
FMV of old melter	$6,760
Cost of New melter	$19,760

(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	$910
	Accumulated depreciation-Melter		$910
	(To record depreciation expense)
	Melter	$18350
	Accumulated depreciation-Melter	$9,100
	Melter		$14,450
	Cash		$13,000
	(To record purchase and trade-in of Melter)