Question

Gilly Construction trades in an old tractor for a new tractor, receiving a \(29,000 trade-in allowance and paying the remaining \)83,000 in cash. The old tractor had cost \(96,000, and straight-line accumulated depreciation of \)52,500 had been recorded to date under the assumption that it would last eight years and have a $12,000 salvage value. Answer the following questions assuming the exchange has commercial substance.

1. What is the book value of the old tractor at the time of exchange?
2. What is the loss on this asset exchange?
3. What amount should be recorded (debited) in the asset account for the new tractor?

Short answer

1. The book value of the old tractor at the time of exchange is $43,500.
2. The loss of Gilly Construction trades on the asset exchange amounts to $14,500.
3. Tractor expense $112,000

Step-by-step solution

Book value of the old tractor

$\begin{array}{rcl}\mathit{B}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}& \mathbf{=}& \mathbf{cos}\mathit{t}\mathbf{-}\mathit{a}\mathit{c}\mathit{c}\mathit{u}\mathit{m}\mathit{u}\mathit{l}\mathit{a}\mathit{t}\mathit{e}\mathit{d}\mathbf{}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\\ bookvalue& =& \$96,000-\$52,500\\ bookvalue& =& \$43,500\end{array}$

The book value of the old tractor at the time of exchange is $43,500.

Loss on the exchange of asset

Trade-in allowance: -trade-in allowance is the value assigned by the dealer to a used vehicle taken in trade from a customer to reduce the price of another vehicle.

Computation of loss on exchange: -

$\begin{array}{rcl}\mathit{l}\mathit{o}\mathit{s}\mathit{s}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{t}\mathit{h}\mathit{e}\mathbf{}\mathit{e}\mathit{x}\mathit{c}\mathit{h}\mathit{a}\mathit{n}\mathit{g}\mathit{e}& \mathbf{=}& \mathit{b}\mathit{i}\mathit{i}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{-}\mathit{t}\mathit{r}\mathit{a}\mathit{d}\mathit{e}\mathbf{}\mathit{i}\mathit{n}\mathbf{}\mathit{a}\mathit{l}\mathit{l}\mathit{o}\mathit{w}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\\ loss& =& \$43,500-\$29,000=\$14,500\end{array}$

The loss of Gilly Construction trades on the asset exchange amounts to $14,500.

Debit to new tractor account

$$\begin{gathered} \mathit{c}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{p}\mathit{a}\mathit{i}\mathit{d}\mathbf{+}\mathit{t}\mathit{r}\mathit{a}\mathit{d}\mathit{e}\mathbf{}\mathit{i}\mathit{n}\mathbf{}\mathit{a}\mathit{l}\mathit{l}\mathit{o}\mathit{w}\mathit{a}\mathit{n}\mathit{c}\mathit{e} \\ \$83,000+\$29,000 \\ =\$112,000 \end{gathered}$$

Single entry to record exchange of a tractor

Tractor (new)	$112,000
Loss on exchange of assets	$14,500
Accumulated depreciation-tractor	$52,500
Tractor (old)		$96,000
Cash		$83,000
Record exchange of asset