Question

Crowe Company purchased a heavy-duty truck on July 1, 2014, for \(30,000. It was estimated that it would have a useful life of 10 years and then would have a trade-in value of \)6,000. The company uses the straight-line method. It was traded on August 1, 2018, for a similar truck costing \(42,000; \)16,000 was allowed as trade-in value (also fair value) on the old truck and $26,000 was paid in cash. A comparison of expected cash flows for the trucks indicates the exchange lacks commercial substance. What is the entry to record the trade-in?

Short answer

New truck debited by $42,000, accumulated depreciation debited by $9,800, loss on disposal of trucks debited by $4,200, old trucks credited by $30,000 and cash credited by $26,000 to record the trade-in.

Step-by-step solution

Calculation of accumulated depreciation and loss on disposal of trucks

$\begin{array}{c}\mathbf{AccumulatedDepreciation}\mathbf{=}\left(\mathrm{OldTrucksCost}-\mathrm{Trade}-\mathrm{inValue}\right)\mathbf{\times }\mathbf{NumberofMonths}\\ \mathbf{=}\left(\$30,000-\$6,000\right)\mathbf{\times }\frac{49}{120}\\ =\$9,800\end{array}$

$\begin{array}{c}\mathbf{Losson}\mathbf{}\mathbf{Disposal}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Trucks}\mathbf{=}\left(\mathrm{Book}\mathrm{Value}-\mathrm{Trade}-\mathrm{in}\mathrm{Value}\right)\\ =\$20,200-\$16,000\\ =\$4,200\end{array}$

Journal entry to record the Trade-in

Date	Particulars	Debit ($)	Credit ($)
	New Trucks	$42,000
	Accumulated depreciation	$9,800
	Loss on disposal of trucks	$4,200
	Old trucks		$30,000
	Cash		$26,000
	Being record the trade-in