On January 1, 2010 Herschel Locks Corporation purchased drilling equipment for $

Question

On January 1, 2010 Herschel Locks Corporation purchased drilling equipment for $11,500. The equipment has an estimated useful life of four years and a salvage
value of $200. Assuming that Herschel uses the straight-line method of depreciation, if it trades the equipment for new equipment with a list price of $15,500 on December 31, 2011, and pays $4,050 in the exchange, assuming the exchange lacks commerical substance, the new equipment should be recorded at:

A. $15,500
B. $11,450
C. $9,850
D. $9,900

I think the answer is D. ($9,900) because of the lack of commercial substance, the Gain does not have to be recognized. But I am totally unsure. Please help!

Explanation / Answer

The correct option is $9,900 Since Depreciation expense is $2,825, accumulated depreciation is ACcumulated depreciation = $2,825 * 2 = $5,650 Therefore, book value of the equipment is Book value = $11,500 - $5,650 = $5,850 But, the cash paid for the equipment is $4,050 Therefore, the value of the new equipment is ($5,850 + $4,050 = $9,900)

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