Question

Caleb Co. owns a machine that costs \(42,400 with accumulated depreciation of \)18,400. Caleb exchanges the machine for a newer model that has a market value of \(52,000.

1. Record the exchange assuming Caleb paid \)30,000 cash and the exchange has commercial substance.
2. Record the exchange assuming Caleb paid $22,000 cash and the exchange has commercial substance.

Short answer

1. The value of the old machine is credited with $42,400.
2. The gain on the exchange is credited with $6,000.

Step-by-step solution

Disposal of asset by exchanging

Machine (new)	$52,000
Loss on Exchange of Assets	$2,000
Accumulated Depreciation—Machine (old)	$18,400
Machine (old)		$42,400
Cash		$30,000
Record exchange of old machine and cash for new machine

Many plant assets such as machinery, automobiles, and equipment are disposed of by exchanging them for newer assets.

Loss in first case

Note:

$\begin{array}{rcl}\mathbf{Book}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{machine}& \mathbf{=}& \mathbf{cost}\mathbf{-}\mathbf{accumulated}\mathbf{}\mathbf{depreciation}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{42}\mathbf{,}\mathbf{400}\mathbf{-}\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{400}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{000}\mathbf{.}\end{array}$

$\begin{array}{rcl}\mathbf{Gain}\mathbf{}\mathbf{or}\mathbf{}\mathbf{Loss}& \mathbf{=}& \mathbf{market}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{new}\mathbf{}\mathbf{machine}\mathbf{-}\left(\mathrm{book}\mathrm{value}\mathrm{of}\mathrm{old}\mathrm{machine}+\mathrm{cash}\right)\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{52}\mathbf{,}\mathbf{000}\mathbf{-}\left(\$24,000+\$30,000\right)\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{2000}\mathbf{}\left(\mathrm{loss}\right)\mathbf{.}\\ & & \end{array}$

Gain in second case

Machine (new)	$52,000
Accumulated Depreciation—Machine (old)	$18,400
Machine (old)		$42,400
Cash		$22,000
Gain on Exchange of Assets		$6,000
Record exchange of old machine and cash for new machine

Note:

$\begin{array}{rcl}\mathbf{Gain}\mathbf{}\mathbf{or}\mathbf{}\mathbf{Loss}& \mathbf{=}& \mathbf{market}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{new}\mathbf{}\mathbf{machine}\mathbf{-}\left(\mathrm{book}\mathrm{value}\mathrm{of}\mathrm{old}\mathrm{machine}+\mathrm{cash}\right)\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{52}\mathbf{,}\mathbf{000}\mathbf{\$}\mathbf{-}\left(24,000+\$22,000\right)\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{6000}\mathbf{}\left(gain\right)\mathbf{.}\end{array}$