Question

The transactions listed below occurred at Murphy Company during 2016:
Mar. 25	Exchanged a printer (Office Equipment) that had an original cost of $5,050 when purchased on January 4, 2014. The useful life of the old asset was originally estimated at four years and the salvage value at $250. The new printer had a price and market value of $10,400. Murphy gave up the old machine and paid $5,200 cash. The new printer is estimated to have a useful life of five years and a salvage value of $650.
July 19	Exchanged a truck (Vehicles) for a new one that had a sales price, and fair value, of $43,800. Received a trade-in allowance of $11,000 on the old truck and paid cash of $32,800. The old truck had been purchased for $36,060 on May 27, 2013, three years earlier. The life of the old truck was originally estimated at four years and the salvage value at $6,300. The life of the new truck is estimated to be five years and it is estimated to have a salvage value of $9,300.
Aug. 18	Sold a truck that was purchased on January 5, 2014, for $43,020. It had an estimated life of four years and an estimated salvage value of $7,500. Sales price is as indicated in Instructions, below.

Note: In following these instructions, assume that straight-line depreciation is used and that depreciation was last recorded on December 31, 2015. (Note: The presentation in the text related to the exchanges of assets has been superseded by FAS 153. Under FAS 153, gains and losses on the exchange of assets that have commercial substance are recognized in full. The deferral of gains (by reducing the basis in the new asset) only pertains to assets that lack commercial substance.)

1.	Prepare the journal entries to record the two exchange transactions. 2. Record the journal entries for the truck sold on August 18, 2016.

Answer 1

Date	Account titles and explanations	Debit ($)	Credit ($)
25-03-16	New printer - Office equipment	10400
	Old Printer- Office equipment		2650
	Bank		5200
	Profit on exchange of old printer		2550
	(Being the old printer exchange for a new printer)
	Profit on exchange of old printer	2550
	Profit and loss account		2550
	(Being the profit on exchange of printer is adjusted in the profit and loss account)

     

Workings:

Original cost of the office equipment	5050
Less: Salvage value	250
Depreciable value	4800
Useful life of the asset	4 years
Annual depreciation (4800/4)	1200
Original cost of the office equipment	5050
Less: Depreciation till 2016 (1200 X 2)	2400
Value of the office equipment as on the date of exchange	2650

Price of new printer	10400
Less: Cash paid for the new machine	5200
Exchange value of old office equipment	5200
Less: value of the old equipment as on the date of exchange	2650
Profit on exchange	2550

Date	Account titles and explanations	Debit ($)	Credit ($)
19-07-16	New truck	43800
	Loss on exchange	2740
	Old truck		13740
	Bank		32800
	(Being new truck purchased on exchange of old truck)
	Profit and loss account	2740
	Loss on exchange		2740
	(Being loss on exchange transferred to profit and loss account)

Workings:

Original cost of the old truck	36060
Less: Salvage value	6300
Depreciable value	29760
Useful life of the asset	4 years
Annual depreciation (29760/4)	7440
Original cost of the old truck	36060
Less: Depreciation till 2016 (7440 X 3)	22320
Value of the old truck as on the date of exchange	13740
Less: trade in allowance for old truck	11000
Loss on exchange of old truck	2740

Date	Account titles and explanations	Debit ($)	Credit ($)
18-08-16	Bank	16380
	Truck		16380
	(Being truck sold)

Workings:

Original cost of the truck	43020
Less: Salvage value	7500
Depreciable value	35520
Useful life of the asset	4 years
Annual depreciation (29760/4)	8880
Original cost of the old truck	43020
Less: Depreciation till 2016 August (8880 X 3)	26640
Sale proceed from Truck	16380

Note: Since the truck was sold in August, 2016 and the date of purchase of the truck was January 5, 2014 thus, depreciation has been charged for three years.