Teal Company purchased an electric wax melter on April 30, 2017, by trading in i

Question

Teal Company purchased an electric wax melter on April 30, 2017, 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. Teal’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016. (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.)

No.

Account Titles and Explanation

Debit

Credit

(a)

Exchange has commercial substance:

(To record current depreciation.)

(To record exchange of the equipment.)

(b)

Exchange lacks commercial substance:

(To record current depreciation.)

(To record exchange of the equipment.)

List price of new melter $20,224 Cash paid 12,800 Cost of old melter (5-year life, $896 salvage value) 14,336 Accumulated Depreciation-old melter (straight-line) 8,064 Secondhand fair value of old melter 6,656

Explanation / Answer

(ALL VALUES IN $)

To Accumulated Depreciation Cr.                          896

                                (To record current depreciation)

ii)            Melter(new) Dr.          194

Accumulated Depreciation Dr.          8960

                To Gain on disposal of Melter Cr.                          1280

                To Melter (old) Cr.                          14336

                To Cash Cr.                          12800

(To record exchange of the equipment.)

To Accumulated Depreciation Cr.                          896

                                (To record current depreciation)

ii)            Melter(new) Dr.          19456

Accumulated Depreciation Dr.          8960

                To Gain on disposal of Melter Cr.                          1280

                To Melter (old) Cr.                          14336

                To Cash Cr.                          12800

(To record exchange of the equipment.)

Working Notes:

Less: Accumulated Depreciation (8064+896)   (8960)

Book Value of Equipment (old) 5376

Less: Fair Value of old asset   (6656)                  

Gain on disposal of equipment                                 1280

Fair Value of Melter (old) 6656

Cost of new asset 19456

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