Question

On January 2, 2017, Bering Co. disposes of a machine costing \(44,000 with accumulated depreciation of \)24,625. Prepare the entries to record the disposal under each of the following separate assumptions.

1. The machine is sold for \(18,250 cash.
2. The machine is traded in for a newer machine having a \)60,200 cash price. A \(25,000 trade-in allowance is received, and the balance is paid in cash. Assume the asset exchange has commercial substance.
3. The machine is traded in for a newer machine having a \)60,200 cash price. A $15,000 trade-in allowance is received, and the balance is paid in cash. Assume the asset exchange has commercial substance.

Short answer

1. The loss on sale is $1,125
2. The cash balance is $35,200
3. The loss on sale is $4,375

Step-by-step solution

Computation of book value of machine

$\begin{array}{rcl}\mathit{B}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}& \mathbf{=}& \mathit{c}\mathit{o}\mathit{s}\mathit{t}\mathbf{-}\mathit{a}\mathit{c}\mathit{c}\mathit{u}\mathit{m}\mathit{u}\mathit{l}\mathit{a}\mathit{t}\mathit{e}\mathit{d}\mathbf{}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\\ bookvalue& =& \$44,000-\$24,625\\ bookvalue& =& \$19,375\end{array}$

(1) entry to record sale for $18,250

Jan 2	Cash	$18,250
	Loss on sale of machinery	$1,125
	Accumulated depreciation-machinery (old)	$24,625
	Machinery (old)		$44,000
	Record sale of machine

Note: -

$\begin{array}{rcl}\mathit{p}\mathit{r}\mathit{o}\mathit{f}\mathit{i}\mathit{t}\mathbf{}\mathit{o}\mathit{r}\mathbf{}\mathit{l}\mathit{o}\mathit{s}\mathit{s}& \mathbf{=}& \mathit{s}\mathit{e}\mathit{l}\mathit{l}\mathit{i}\mathit{n}\mathit{g}\mathbf{}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{-}\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\\ profitorloss& =& \$18,250-\$19,375\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{125}\mathbf{\left(}\mathit{l}\mathit{o}\mathit{s}\mathit{s}\mathbf{\right)}\end{array}$

(2) exchange of machine

Jan 2	Machinery (new)	$54,575
	Accumulated depreciation-machinery (old)	$24,625
	Machinery (old)		$44,000
	Cash		$35,200
	Record asset exchange

Note:

Valuation of new machine: -

$\begin{array}{rcl}\mathit{n}\mathit{e}\mathit{w}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}& \mathbf{=}& \mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{-}\mathbf{(}\mathit{t}\mathit{r}\mathit{a}\mathit{d}\mathit{e}\mathbf{}\mathit{i}\mathit{n}\mathbf{}\mathit{a}\mathit{l}\mathit{l}\mathit{o}\mathit{w}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\mathbf{-}\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{(}\mathit{o}\mathit{l}\mathit{d}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathbf{\left)}\mathbf{\right)}\\ newmachine& =& \$60,200-(\$25,000-\$19,375)\\ newmachine& =& \$54,575\end{array}$

Cash: -

$$\begin{gathered} \mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{}\mathbf{(}\mathit{n}\mathit{e}\mathit{w}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathbf{)}\mathbf{-}\mathit{t}\mathit{r}\mathit{a}\mathit{d}\mathit{e}\mathbf{}\mathit{i}\mathit{n}\mathbf{}\mathit{a}\mathit{l}\mathit{l}\mathit{o}\mathit{w}\mathit{a}\mathit{n}\mathit{c}\mathit{e} \\ \$60,200-\$25,000=\$35,200 \end{gathered}$$

(3) entry to record asset exchange

Jan 2	Machinery (new)	$60,200
	Loss on exchange of machine	$4,375
	Accumulated depreciation- machine (old)	$24,625
	Machine (old)		$44,000
	Cash		$45,200
	Record asset exchange

Note:

Cash: -

$$\begin{gathered} \mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{(}\mathit{n}\mathit{e}\mathit{w}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathbf{)}\mathbf{-}\mathit{t}\mathit{r}\mathit{a}\mathit{d}\mathit{e}\mathbf{}\mathit{i}\mathit{n}\mathbf{}\mathit{a}\mathit{l}\mathit{l}\mathit{o}\mathit{w}\mathit{a}\mathit{n}\mathit{c}\mathit{e} \\ \$60,200-\$15,000=\$45,200 \end{gathered}$$

Loss on exchange: -

$$\begin{gathered} \mathit{l}\mathit{o}\mathit{s}\mathit{s}\mathbf{=}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{(}\mathit{n}\mathit{e}\mathit{w}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathbf{)}\mathbf{-}\mathbf{(}\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{(}\mathit{o}\mathit{l}\mathit{d}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathbf{)}\mathbf{+}\mathit{c}\mathit{a}\mathit{s}\mathit{h}\mathbf{)} \\ loss=\$60,200-(\$19,375+\$45,200) \\ loss=\$60,200-\$64,575 \\ loss=\$4,375 \end{gathered}$$