Cannondale Company purchased an electric wax melter on April 30, 2014, by tradin
ID: 2455364 • Letter: C
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 8,736Explanation / Answer
Commercial substance
Depreciation =( Cost - residual value )/ estiamted life
= $)18,816- $1176)/5 = $3528
Depreciation for 4 months = $3528 *4/12 = $1176
Journal entries
cost of old asset $18,816
Accumulated dep 11,760
Book value $7,056
Fair value of old asset ($8,736)
Gain on disposal of asset $1,680
Cash paid $16,800
FMV of old meter 8,736
Cost of new melter $25,536
B) Exchange lacks commercial substance
cash paid $16,800
Fair value of old assets 7,056
Cost of new asset $23,856
No gain is recognised since it lacks commercial substance
Depreciation expense $1176 to Accumulated depreciation - Melter $1,176Related Questions
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