4.Assume that a machine, with a carrying amount of $45,000 (cost: $50,000 and ac
ID: 2520737 • Letter: 4
Question
4.Assume that a machine, with a carrying amount of $45,000 (cost: $50,000 and accumulated depreciation: $5,000), is given in exchange for another similar machine. The exchange is considered to have no impact on future cash flows (or present value thereof) of the business as a whole. Required: Discuss how this should be recorded in the general ledger, if at all, assuming that: A. the fair value of the machine given up is $30,000 (the fair value of the newly acquired machine is unavailable); B. the fair value of the newly acquired machine is $30,000 (the fair value of the machine given up is unavailable); and c. neither the fair value of the machine given up nor the machine acquired is available.Explanation / Answer
As Fair market value of newly acquired machine is not given we will assume that the Fair market value of asset given is equal to fair market value of newly acquired machine.and the difference between book value and Fair market value will be recorded as loss.
Book value of old machine =450000
Fair market value of old machine =30000
Loss on exchange = 15000.
Journal entry would be for recording exchange
New machine account Dr. 30000
Loss on exchange Dr. 15000
To old machine account. 45000
(Being old machine exchange with new machine)
Answer to part B
In this case fair market value of machine newly acquired is given and new machine will be recorded at fair market value.
And loss on exchange of machine will be calculated as follows.
Book value of old machine 45000.
Fair market value of new machine 30000
Loss on exchange of machine will be 15000.
Journal entry would be for recording exchange of machine
New machine account Dr 30000
Loss on exchange. Dr 15000
To old machine account. 45000
(Being new machine having fmv 30000 exchanged)
Answer to part C)
In this case fair value of both machine is not known hence in this situation we have to record new machine at book value of old machine exchanged.
Journal entry would be as follows
New machine account Dr 45000
To old machine account 45000
(Being old machine exchanged with new one)
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