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

Can you please explain the calculation of each value?

List price of new melter $39,184 Cash paid 24,800 Cost of old melter (5-year life, $1,736 salvage value) 27,776 Accumulated Depreciation-old melter (straight-line) 15,624 Secondhand fair value of old melter 12,896 No. Account Titles and Explanation (a) Exchange has commercial substance: Debit Credit Depreciation Expense 1736 Accumulated Depreciati (To record current depreciation.) Accumulated Depreciation- Equipment 1736 17360 Cash 24,800 Equipment Gain on Disposal of Equipm (To record exchange of the machine.)

Explanation / Answer

Question a. Journal entries: Accomulated Depreciation 17360 Equipment 39184 Cash 24800 Equipment 30256 Gain on disposal of Equipment 1488 Exchange value of old Machine = 39184-24800 = 14384 Total Value of the old melter = 12896+17360 = 30256 Market Value of old melter 12896 Exchange Value 14384 Gain on exchange 1488 Question b. Depreciation expenses Accomulated Depreciation (To record Depreciation) Journal entries: Accomulated Depreciation 17360 Equipment 39184 Cash 24800 Equipment 27776 Gain on disposal of Equipment 3968 Exchange value of old Machine = 39184-24800 = 14384 Cost of Old Melter 27776 Less: Accumulated Depreciation 17360 Book Value 10416 Exchange Value 14384 Gain on exchange 3968

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