Question

(Nonmonetary Exchange) Cannondale Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

List price of new melter	\(15,800
Cash paid	10,000
Cost of old melter (5-year life, \)700 salvage value)	11,200
Accumulated depreciation—old melter (straight-line)	6,300
Secondhand fair value of old melter	5,200

Instructions

Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange

1. has commercial substance, and
2. lacks commercial substance. Cannondale’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016.

Short answer

1. Accumulated depreciation is $7,000
2. Accumulated depreciation-Equipment $7,000

Step-by-step solution

Meaning of Commercial Substance

Due to a business entity's transaction, there will be a change in the business's future cash flow; that particular transaction has a commercial substance.

(a) Preparing journal entries

The exchange has commercial substance:

Date	Particular	Debit ($)	Credit ($)
	Depreciation Expense	700
	Accumulated Depreciation Equipment		700
	(To record depreciation expense)

Working notes:

$\begin{array}{rcl}\mathit{A}\mathit{c}\mathit{c}\mathit{u}\mathit{m}\mathit{u}\mathit{l}\mathit{a}\mathit{t}\mathit{e}\mathit{d}\mathbf{}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{o}\mathbf{l}\mathbf{d}\mathbf{}\mathbf{m}\mathbf{e}\mathbf{l}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{-}\mathbf{S}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\mathbf{\times }\frac{\mathbf{M}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}\mathbf{s}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{n}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}}{\mathbf{M}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}\mathbf{s}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{a}\mathbf{}\mathbf{y}\mathbf{e}\mathbf{a}\mathbf{r}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{11}\mathbf{,}\mathbf{200}\mathbf{-}\mathbf{\$}\mathbf{700}}{\mathbf{5}}\mathbf{\times }\frac{\mathbf{4}}{\mathbf{12}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{700}\end{array}$

Date	Particular	Debit ($)	Credit ($)
	Equipment	15,200
	Accumulated Depreciation-Equipment	7,000
	Gain on Disposal of Equipment		1,000
	Equipment		11,200
	Cash		10,000
	(To record exchange of equipment)

Working notes:

Calculation of gain on disposable asset

Cost of the old asset	$11,200
Less: Accumulated depreciation ($6,300+$700)	7,000
Book value of the equipment (old)	4,200
Less: Fair value of the old asset	(5,200)
Gain on disposal of equipment	$ 1,000

Calculation of cost of new asset

$\begin{array}{rcl}\mathit{A}\mathit{s}\mathit{s}\mathit{e}\mathit{t}& \mathbf{=}& \mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{p}\mathit{a}\mathit{i}\mathit{d}\mathbf{+}\mathit{F}\mathit{a}\mathit{i}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{o}\mathit{l}\mathit{d}\mathbf{}\mathit{a}\mathit{s}\mathit{s}\mathit{e}\mathit{t}\\ & \mathbf{=}& \mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{200}\\ & \mathbf{=}& \mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{200}\end{array}$

(b) Preparing journal entries

Exchange lacks commercial substance:

Date	Particular	Debit ($)	Credit ($)
	Depreciation Expense	700
	Accumulated Depreciation Equipment		700
	(To record depreciation expense)
	Equipment (melter)	15,200
	Accumulated Depreciation-Equipment	7,000
	Gain on Disposal of Equipment		1,000
	Equipment		11,200
	Cash		10,000
	(To record exchange of equipment)

Working notes:

Calculation of cost of new asset

$\begin{array}{rcl}\mathit{A}\mathit{s}\mathit{s}\mathit{e}\mathit{t}& \mathbf{=}& \mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{p}\mathit{a}\mathit{i}\mathit{d}\mathbf{+}\mathit{F}\mathit{a}\mathit{i}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{o}\mathit{l}\mathit{d}\mathbf{}\mathit{a}\mathit{s}\mathit{s}\mathit{e}\mathit{t}\\ & \mathbf{=}& \mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{200}\\ & \mathbf{=}& \mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{200}\end{array}$