Layne Co. has a machine that cost $516,000 on March 20, 2011. This old machine h
ID: 2425848 • Letter: L
Question
Layne Co. has a machine that cost $516,000 on March 20, 2011. This old machine had an estimated life of ten years and a salvage value of $25,000. On December 23, 2015, the old machine is exchanged for a new machine with a fair value of $324,000. The exchange lacked commercial substance. Layne also received $36,000 cash. Assume that the last fiscal period ended on December 31, 2014, and that straight-line depreciation is used.
Show the calculation of the amount of gain or loss to be recognized by Layne Co. from the exchange
Prepare all entries that are necessary on December 23, 2015. Show a check of the amount recorded for the new machine
Explanation / Answer
Amount in $
Cost of the mechine = 5,16,000
Life of the mechine = 10 yrs
salvage value = 25,000
Depreciation per year = (5,16,000 - 25,000)/10
= 49,100
Book value as on December 23,2015 = Cost - Depreciation for 5 years (from 2011 to 2015)
= 4,91,000 - 2,45,500
= 2,45,500
Calculation of gain/loss:
Value of the new machine = 3,24,000
Cash received = 36,000
Book vale of the old machine = 245,500
Gain in exchange = (3,24,000+36,000)- 2,45,500
= 1,14,500
Journal entry:
New machine A/cDr 3,24,000
Cash A/c Dr 36,000
To Old machine 2,45,500
To Profit on exchange 1,14,500
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