Layne Co. has a machine that cost $502,000 on March 20, 2011. This old machine h

Question

Layne Co. has a machine that cost $502,000 on March 20, 2011. This old machine had an estimated life of ten years and a salvage value of $31,000. 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

A.

B.

Cost          5,02,000 Accumulated Depreciation (4 3/4 *((502,000-31,000)/10)        -2,23,725 Book value          2,78,275 Fair value (324,000+36,000)          3,60,000 Gain              81,725 Gain recoganized (36/360*81,725)                8,173

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