Sanderson & benit construction inc. purchased equipment with a cost of $40,000 a

Question

Sanderson & benit construction inc. purchased equipment with a cost of $40,000 and a salvage value of $5,000 with a life of 5 years. The equipment is now fully depreciated. If the old equipment is exchanged for new equipment at a cash price of $42,000 with an appraised value of $40,000, the entry for this exchange would debit the new equipment for :
a) $42,000 with a debit to loss on exchange for $5000
B) $47,000 with no debit to loss on exchange
C)$42,000 with no debit to loss on exchange
D) $40,000 with a debit to loss on exchange for $7,000

Explanation / Answer

Ans: D) $40,000 with a debit to loss on exchange for $7,000

i.e

DR Land (new) $40,000

DR Loss on Exchange $7,000

CR Land(Old) $5000

CR Cash $42,000

Note: Here loss on asset is =Cash paid+Old asset value-Fair value of new land

   =$42000+$5000-$40000

   =$7000

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