Question

During 2018, Lora Company completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of\)129,000 and accumulated depreciation of \(74,000) for new equipment.Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000.Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000through December 31 of the preceding year). Lora received \)7,100 cashfrom the sale of the equipment. Depreciation is computed on a straightlinebasis. The equipment has a five-year useful life and a residual valueof \(0.

Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balancemethod over four years with a \)7,000 residual value.

Record the transactions in the journal of Lora Company.

Short answer

Gain on the exchange on office equipment is$6,000

Loss on sale of equipment is$3,300

Depreciation on office equipment is$58,000

Step-by-step solution

Meaning of Journal

Journal refers to the recording of monetary transactions of a business in the manner in which they arise.

Showing journal entries

Date	Particulars	Debit ($)	Credit ($)
Jan 1	Office Equipment (New)	116,000
	Accumulated Depreciation-Office equipment	74,000
	Office Equipment (Old)		129,000
	Cash		55,000
	Gain on exchange		6,000
	(To office equipment exchanged with gain )
Apr 1	Cash	7,100
	Accumulated Depreciation-equipment	1,600
	Loss on sale of equipment	3,300
	Equipment		12,000
	(To office equipment exchanged with gain)
Dec 31	Depreciation Expense -Office equipment	58,000
	Accumulated Depreciation -equipment		58,000
	(To depreciation charged on office equipment)

Working note:

1. Calculation of gain on exchange of equipment

$\begin{array}{c}Gainonexchange=FairValueofnewequipment-Bookvalueofoldequipment-Cashpaid\\ =\$116,000-\left(\$129,000-\$74,000\right)-\$55,000\\ =\$6,000\end{array}$

2. Calculation of partial depreciation on equipment sold on 1 April

$\begin{array}{c}Depreciationforcurrentyear=\frac{Cost-ResidualValue}{Usefullife}\times \frac{Monthinuse}{12}\\ =\frac{\$12,000-\$0}{5}\times \frac{3}{12}\\ =\$600\end{array}$

3. Calculation of depreciation expense on office equipment by double declining method

Year	Opening value/ Depreciable base	Depreciation rate	Depreciation expenses	Accumulated depreciation	Ending value
1	$116,000	50%	$58,000	$58,000	$58,000
2	$58,000	50%	$29,000	$87,000	$29,000
3	$29,000	50%	$14,500	$101,500	$14,500
4	$14,500	50%	$7,250	$7,250	$7,250

$\begin{array}{c}Depreciationrate=\frac{100\%}{Usefullife}\\ =\frac{100\%}{4}\times 2\\ =50\%\end{array}$