Question

Mehta Company traded a used welding machine (cost $9,000, accumulated depreciation $3,000) for office equipment with an estimated fair value of $5,000. Mehta also paid $3,000 cash in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Answer 1

Answer:

Debit : Office Equipment at Fair Value $5,000

Debit : Accumulated depreciation - Welding machine  $3,000

Debit : Profit and Loss $4,000

Credit  : Cash $3,000

Credit  : Cost of Welding Machine $9,000

Explanation:

If the exchange has commercial substance, the assets acquired is deemed to have a cost equal to the Fair Value of Asset given up.

Thus Fair Value of Asset given up (Welding Machine) is $5,000. This becomes the Cost of the New Asset - Office Equipment.

The Cost and Accumulated depreciation of the Old Asset are derecognized by Crediting and Debiting the respective Accounts. Also Cash advanced is recognized.

This journal calculates the Profit or Loss on the Exchange as $4,000 (loss).