Cannondale Company purchased an electric wax melter on April 30, 2014, by tradin

Question

Cannondale Company purchased an electric wax melter on April 30, 2014, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

Prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Cannondale’s year ends on December 31, and depreciation has been recorded through December 31, 2013

No.

Account Titles and Explanation

Debit

Credit

(a)

Exchange has commercial substance:

(To record current depreciation.)

(To record exchange of the machine.)

(b)

Exchange lacks commercial substance:

(To record current depreciation.)

(To record exchange of the machine.)

List price of new melter $26,544 Cash paid 16,800 Cost of old melter (5-year life, $1,176 salvage value) 18,816 Accumulated Depreciation-old melter (straight-line) 10,584 Secondhand fair value of old melter 8,736

Explanation / Answer

Fair value of asset exchanged 8736 34.21%

Cash paid 16800    65.79%

Total 25536

As boot paid is more than 25% of the fair value of asset exchanged, no gain will be recorded by Cannondale Company, when no commercial substance exists

Hence , the journal entry would be

Equipment Dr 23856

Accumulated Depriciation Dr 11760

Gain on Disposal of Equipment 0

Equipment 18816

Cash 16800

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