Layne Co. has a machine that cost $517,000 on March 20, 2011. This old machine h

Question

Layne Co. has a machine that cost $517,000 on March 20, 2011. This old machine had an estimated life of ten years and a salvage value of $27,000. On December 23, 2015, the old machine is exchanged for a new machine with a fair value of $324,000. The exchange lacked commercial substance. Layne also received $36,000 cash. Assume that the last fiscal period ended on December 31, 2014, and that straight-line depreciation is used.

Show the calculation of the amount of gain or loss to be recognized by Layne Co. from the exchange. (Round answer to 0 decimal places, e.g. 1,215.)

Prepare all entries that are necessary on December 23, 2015. Show a check of the amount recorded for the new machine. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 1,215.)

Explanation / Answer

Book value for the year ended December 31, 2014 = $ 2,94000 + $ 27000 = $ 321000

Exchange value on the date of exchange = $ 3,24,000

Add : Cash received = $ 36000

Exchange Value = $ 360000

Gain on exchange of asset = $ 39000

Journal entries in the books of Layne co. on the date of December 23, 2015

a) Profit on sale of asset a/c Dr $ 39000

Profit & loss a/c Cr $ 39000

(Being profit on exchange of asset)

b) New asset a/c Dr $ 324000

Cash a/c Dr $ 36000

Old asset a/c Cr $ 360000

( Being exchange of old asset with new one)

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