Question

Problem 1
J & J is considering replacing some of their older computers. Give the potential entries given the following scenarios. Assume all scenarios are independent (B is not independent from A) and have no commercial substance.

a. Fourteen new computers - $140,000, additional $2,000 for freight and 6% tax on $140,000. Estimated useful life is 5 years with 5% salvage value. They are treated as a single unit for financial reporting purposes. No trade-ins.
b. Ten existing computers will be traded in (total trade-in value $10,000) for the new computers. The computers are treated as a single unit with an original cost of $80,000 and book value of $8,000. The remainder was paid in cash. They are treated as a single unit for financial reporting purposes

c. Ten existing computers will be traded in (total trade-in value $20,000) for the new computers. The computers are treated as a single unit with an original cost of $80,000 and book value of $20,000. The remainder was paid in cash. They are treated as a single unit for financial reporting purposes

Required:
Prepare the potential journal entries for the above events.

Part B is not independent from A. Please show all calculations. Thanks

Answer 1

Calculation of Total purchase cost of 14 new computers

Purchase cost of 14 new computers	$ 140,000.00
6% Tax on $140,000	$      8,400.00
Freight	$      2,000.00
Total Purchase Cost	$ 150,400.00

Calculation of Profit/Loss on trade of existing computers and amount to be paid in cash Scenario 1

Trade value of 10 existing computers	$    10,000.00
Book value	$      8,000.00
Profit on Sale of computers	$      2,000.00

Total amount to be paid in cash =

Total purchase cost - Trade value of exisiting computers

$ 150,400 - $10,000 = $ 140,400

Scenario 2 -

Trade value of 10 existing computers	$    20,000.00
Book value	$    20,000.00
Profit on Sale of computers	$ -

Total amount to be paid in cash =

Total purchase cost - Trade value of exisiting computers

$ 150,400 - $20,000 = $ 130,400

Journal Entries to be recorded:

Note: when the existing asset is exchanged the Accumulated depreciation account would be debited to the extent of depreciation amounts charged to the computer account in the past. The amount can be calculated by deducting the book value of the asset from the original cost of the asset.

Journal Entries -