Question

Slaton Corporation traded a used truck for a new truck. The used truck cost \(20,000 and has accumulated depreciation of \)17,000. The new truck is worth \(35,000. Slaton also made a cash payment of \)33,000. Prepare Slaton’s entry to record the exchange. (The exchange has commercial substance.)

Short answer

The new truck would be recorded at $35,000 with a loss on the exchange of $1,000.

Step-by-step solution

Computation of fair value of the old truck and gain/loss on exchange

$$\begin{gathered} \mathbf{\text{Fairvalueoftheoldtruck=Fairvalueofthenewtruck-Cashpaid}} \\ \mathbf{=}\mathbf{\$}\mathbf{35}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{33}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000} \end{gathered}$$

$$\begin{gathered} \mathbf{\text{Gain/Lossonexchange=Fairvalueoftheoldtruck-Bookvalueofoldtruck}} \\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{(}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{17}\mathbf{,}\mathbf{000}\mathbf{)} \\ \mathbf{=}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000} \end{gathered}$$

Journal entry

As the exchange has commercial substance, the loss would be recorded immediately.

Journal entry

Date	Description	Debit	Credit
	New Truck	$35,000
	Accumulated Depreciation	$17,000
	Loss on exchange	$1,000
	Old Truck		$20,000
	Cash Paid		$33,000
	Being an old truck exchanged for a new truck having commercial substance