Probkn 143 Rogers Co. had a sheet metal cutter that cost $105,000 on January 5,

Question

Probkn 143 Rogers Co. had a sheet metal cutter that cost $105,000 on January 5, 2013. This old cutter had an estimated life of ten years and a salvage value of $20,000. On April 3, 2018, the old cutter is exchanged for a new cutter with a fair value of $60,000. The exchange lacked commercial substance. Rogers also received $15,000 cash. Assume that the last fiscal period ended on December 31, 2017, and that straight-line depreciation is used Calculate the gain or loss to be recognized by Rogers Co. recognized Prepare all entries that are necessary on April 3, 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Account Titles and Explanation Credit (To record depreciation.) (To record exchange of machineries.)

Explanation / Answer

New Cost of cutter as on January 5,2013 = 105000

Estimated life = 10 years

Salvage value = 20000

Book Value of old cutter as on April 3,2018 :

Depreciation for 5 years 3 months = [(105000-20000)/10 ]*5.25

= 8500*5.25 = 44625

Book Value of old cutter = 105000 - 44625 = 60375

Fair value of new cutter = 60000

Cash received in exchange of old cutter = 15000

Total amount received in exchange = 60000 + 15000 = 75000

Gain to be recognised by Rogers Co. = Total amount received in exchange - Book Value

= 75000 - 60375 = 14625

Journal Entry on April 3,2018:

To record depreciation: (3 months in 2018)

Depreciation Expense Dr 2125 (8500*0.25)

Accumulated Depreciation Cr 2125

To record exchange of machines

New Cutter Dr 60000

Cash Dr 15000

Accumulated Depreciation Dr 44625 (8500*5.25)

Old Cutter Cr 105000

Gain on exchange Cr 14625

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