On 11/30/15 Cougar Corp. exchanged an old truck for a piece of equipment and cas
ID: 2452017 • Letter: O
Question
On 11/30/15 Cougar Corp. exchanged an old truck for a piece of equipment and cash.The truck was purchased on 11/1/10 for $20,000 and was depreciated using the straight-line depreciation method based on the following assumptions: a) residual value of $5,600, b) useful life of 6 years. As compensation for the truck, Cougar Corp received a piece of equipment with a fair value of $7,500 and $1,000 cash.
1. Record the journal entry for the exchange assuming the transaction DOES have commercial substance.
2. Record the journal entry for the exchange assuming the transaction DOES NOT have commercial substance. Round all amounts to the nearest dollar.
Explanation / Answer
1.
Prepare the journal entry to record the exchange assuming the transaction does have commercial substance.
Calculate accumulated depreciation on the truck.
Cost of truck = $20,000
Residual value = $5,600
Useful life = 6 years
Therefore,
Annual depreciation = ($20,000 - $5,600) / 6 = $2,400
Depreciation for 5 years 1 month = ($2,400 × 5) + ($2,400 / 12) = $12,200
Thus, accumulated depreciation on the truck is $12,200.
Calculate book value of the equipment.
Book value of truck = Cost of truck – Accumulated depreciation on truck
= $20,000 - $12,200
= $7,800
Calculate gain on the exchange.
Gain = Fair value of equipment received + Cash received – Book value of truck
Therefore,
Gain on exchange = $7,500 + $1,000 – $7,800
= $700
Record the exchange.
Date
Account Titles and Explanation
Debit ($)
Credit ($)
11/30/2015
Accumulated Depreciation
12200
Cash
1000
Equipment
7500
Gain on Exchange
700
Equipment
20000
To record exchange of equipment.
2.
Prepare journal entry to record the exchange assuming the transaction does not have commercial substance.
Date
Account Titles and Explanation
Debit ($)
Credit ($)
11/30/2015
Accumulated Depreciation
12200
Cash
1000
Equipment
6800
Equipment
20000
To record exchange of equipment.
Date
Account Titles and Explanation
Debit ($)
Credit ($)
11/30/2015
Accumulated Depreciation
12200
Cash
1000
Equipment
7500
Gain on Exchange
700
Equipment
20000
To record exchange of equipment.
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