Question

A machine cost $240,000, has annual depreciation expense of $48,000, and has accumulated depreciation of $120,000 on December 31, 2016. On April 1, 2017, when the machine has a fair value of $96,000, it is exchanged for a similar machine with a fair value of $288,000 and the proper amount of cash is paid. The exchange lacked commercial substance.

(1) Prepare a journal entry to recognize the depreciation expense on April, 2017.

(2) Prepare a journal entry to record the exchange of the machines on April 1, 2017.

Answer 1

1)

Date	General Journal	Debit	Credit
Apr-01	Depreciation Expense	$12000
	Accumulated Depreciation		$12000
	(To record Depreciation Expense for 3 months)
	Cost of the machine	$240000
	Less: Acccumulated Depreciation	$132000
	Book value of machine	$108000
	Less: Fair value of the machine	$96000
	Proper Amount of cash paid	$12000
	Fair value of Similar machine	$288000
	Less: Book Value of the Exchanged Machine	$108000
	Gain	$180000
	Recognised gain on Exchange	$7500
	{($12000x $180000)/$288000 }
Date	General Journal	Debit	Credit
Apr-01	Accumulated Depreciation	132000
	Machine	115500
	Machine		240000
	Gain on Disposal of Machine		7500
	(To record Exchange of Machines)