Dana Ashbrook Inc. has negotiated the purchase of a new piece of automatic equip

Question

Dana Ashbrook Inc. has negotiated the purchase of a new piece of automatic equipment at a price of $8,136 plus trade-in, f.o.b. factory. Dana Ashbrook Inc. paid $8,136 cash and traded in used equipment. The used equipment had originally cost $63,054; it had a book value of $42,714 and a secondhand fair value of $48,613, as indicated by recent transactions involving similar equipment. Freight and installation charges for the new equipment required a cash payment of $1,119.

A) Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

*** there are 5 journal entries in this problem

B) Assuming the same facts as in (a) except that fair value information for the assets exchanged is not determinable. Prepare the general journal entry to record this transaction.

Thanks

Explanation / Answer

A) Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance.

A transaction with commercial substance needs to determine the losses or gain in the entire transaction

Journal Entries will be as follow

B) Assuming the same facts as in (a) except that fair value information for the assets exchanged is not determinable.

As there is no fair value information gain or loss is not identifies separately and is observed in the cost of new asset itself

Journal entry will be as below

1 price 8136 2 Cash 8136 3 Original Cost 63064 4 Book Value 42714 5 Second hand Market Value 48613 6 Freight and installation charges 1119 A= 2+5+6 Total Cost of Equipment 57868 B = 3-4 Depreciation 20350 C = 2+6 Total cash paid 9255

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