Question

On January 1, 2017, Frostburg Company purchased for $68,500, equipment having a service life of six years and an estimated residual value of $4,000. Frostburg has recorded depreciation of the equipment using the straight-line method. On December 31, 2019, before making any annual adjusting entries, the equipment was exchanged for new machinery having a fair value of $35,000. The transaction has commercial substance. Use this information to prepare all General Journal entries (without explanation) required to record the events for December 31, 2019.

Answer 1

Answer ;

Equipment = $68,500

Estimated Residual Value = $4,000

Service Life = 6 Years

Depreciation (Straight line ) = ( Cost of Asset - Residual value ) / No of Years of life

= ( $68,500 - $4000) / 6

= $ 10,750 Per Annum

Actual Equipment Value after Depreciation = $68,500 - $10,750 = $57,750

Loss on Exchange of Machinery with Equipment = $57,750 - $35,000 = $ 22,750

Journal Entries as on 31^st Dec 2019 ;

Sr No Particulars Debit ($) Credit($)

1. Depreciation A/c Dr 10,750

To Equipment A/c 10,750

( Being Depreciation Provided to Equipment for Year ending on 31st Dec 2019 )

2. Machinery (New) A/c Dr $ 35,000

Loss on Exchange A/c Dr $ 22,750

To Equipment A/c $ 57,750

( Being loss recognized on Exchange of Machinery with Equipment because the new asset has a Commercial - - Substance)   

Exchange for Non-Monetary Assets

Non-monetary assets are not easily converted to cash, such as equipment. An exchange between non-monetary assets should be analyzed to determine if the exchange has commercial substance. An asset is exchange with commercial substance will cause future cash flows to materially change. If the exchange has commercial substance, the asset received is recorded on the balance sheet at either

(1) the market value (purchase price) of the asset received

or

(2) the market value of the asset given up plus any cash paid.

If the value of the new asset exceeds the book value of the old asset, a gain is recognized. If the new asset’s value is less, a loss is recognized.

For non-monetary asset exchanges without commercial substance, the expectation is that the exchange will not materially alter future cash flows. This type of exchange usually involves like-kind property, such as exchanging a truck for another truck. The asset received is recorded on the balance sheet at the book value of the asset given up plus any cash paid. Gains or losses on these transactions are not recognized.