Question

Wall Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was 100,000, and its accumulated depreciation at the date of exchange was60,000. The asset received had a fair value of 80,000 and a book value of65,000. The entry to record the transaction includes (Select all that apply.)

1) a debit to accumulated depreciation for $60,000.
2) a debit to equipment-new for $65,000.
3) a debit to equipment-new for $80,000.
4) a credit to accumulated depreciation for $60,000.
5) a credit to gain on exchange of asset for $40,000.
6) a credit to equipment-old for $100,000.
7) a credit to equipment-old for $80,000.

Answer 1

The correct accounting entries to record the exchange of equipment with commercial substance are a debit to equipment-new for $80,000, a credit to equipment-old for $100,000, and a credit to accumulated depreciation for $60,000.

Step-by-step explanation:

The student has asked about the accounting entries for a transaction involving the exchange of equipment by Wall Corp. When a transaction has commercial substance, the new asset is recorded at its fair value. The entry to record this transaction should include debit to equipment-new for the fair value of the asset received, credit to equipment-old for the original cost of the asset given up, and credit to accumulated depreciation for the amount of depreciation accumulated on the old asset. Any difference is recognized as a gain or loss on the exchange.

The correct entries to record the transaction are:

1. A debit to Equipment-New for <$strong>80,000 (fair value of the asset received).
2. A credit to Equipment-Old for <$strong>100,000 (original cost of the asset surrendered).
3. A credit to Accumulated Depreciation for <$strong>60,000 (accumulated depreciation on the old asset).
4. If necessary, debit/credit to Loss on Exchange of Asset or Gain on Exchange of Asset to balance the transaction.

This would result in a gain of <$strong>40,000, calculated as the fair value of the new asset minus the book value of the old asset (original cost minus accumulated depreciation).