On October 1, Sebastian Company acquired new equipment with a fair market value

Question

On October 1, Sebastian Company acquired new equipment with a fair market value of $458,000. Sebastian received a trade-in allowance of $92,000 on the old equipment of a similar type and paid cash of $366,000. The following information about the old equipment is obtained from the account in the equipment ledger: Cost, $336,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $220,000; annual depreciation, $20,000.

Required: Assuming the exchange has commercial substance, journalize the entries to record: (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on October 1. Refer to the Chart of Accounts for exact wording of account titles.

Explanation / Answer

Date Account Debit credit october1 Depreciation expense 15000 Accumulated depreciation -equipment 15000 [Being depreciation recorded for the period 1 jan -1 oct :20000*9/12] oct 1 Accumulated depreciation -equipment [220000+15000] 235000 Equipment (new) 458000 loss on exchange of equipment [balancing figure] 9000 Equipment(old) 336000 Cash 366000

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