Q-9-28E - Horngren'S Financial And Managerial Accounting

Question

Question: Exchanging assets—two situations Partner Bank recently traded in office fixtures. Here are the facts

Old fixtures:	New Fixtures
Cost, \(91,000	Cash paid, \)110,000
Accumulated depreciation, \(68,000	Market value, \)133,000

 

Requirements 

1. Record Partner Bank’s trade-in of old fixtures for new ones. Assume the exchange had commercial substance. 

2. Now let’s change one fact. Partner Bank feels compelled to do business with Elm Furniture, a bank customer, even though the bank can get the fixtures elsewhere at a better price. Partner Bank is aware that the new fixtures’ market value is only $126,000. Record the trade-in. Assume the exchange had commercial substance

Step-by-Step Solution

Answer

Answer

 The business entity will generate a loss of $7,000 in the case where the market value of the new fixture is $126,000.

Step 1: Definition of Market Value

The value at which an asset is offered to the buyer in the marketplace is known as market value. Such value is decided by the market factors in which the product is offered for sale. 

Step 2: Recording exchange of asset

Date	Accounts and Explanation	Debit $	Credit $
	New fixture	$133,000
	Accumulated depreciation  - old fixture	$68,000
	Cash		$110,000
	Old fixture		$91,000
	(To record the exchange of asset)

Working note:

Particulars	Amount $	Amount $
Market Value of Asset Received		$133,000
Less: Book Value of Asset exchanged	$23,000
Less: Cash Paid	110,000	(133,000)
Gain		$0

Step 3: Recording exchange of asset

Date	Accounts and Explanation	Debit $	Credit $
	New fixture	126,000
	Accumulated depreciation  - old fixture	68,000
	Loss on exchange	7,000
	Cash		110,000
	Old fixture		91,000
	(To record the exchange of asset)

Working note:

Particulars	Amount $	Amount $
Market Value of Asset Received		$126,000
Less: Book Value of Asset exchanged	$23,000
Less: Cash Paid	110,000	(133,000)
Loss		($7,000)