Q15SE - Horngren'S Financial And Managerial Accounting

Question

Exchanging plant assets Micron Precision, Inc. purchased a computer for \(2,500, debiting Computer Equipment. During 2016 and 2017, Micron Precision, Inc. recorded total depreciation of \)1,600 on the computer. On January 1, 2018, Micron Precision, Inc. traded in the computer for a new one, paying \(2,100 cash. The fair market value of the new computer is \)3,900. Journalize Micron Precision, Inc.’s exchange of computers. Assume the exchange had commercial substance.

Step-by-Step Solution

Answer

The business entity will generate a gain of $900 on the exchange of assets. 

Step 1: Definition of Plant Asset

Plant assets can be defined as all those assets that are employed in the business for their long-term use. It includes the machine acquired for the production of goods. 

Step 2: Calculation of exchanging plant assets

Particulars	$Amount	$ Amount
Market Value of asset		$3,900
Less: Book Value of Asset exchanged	$900
Cash paid	2100	(3000)
Gain		$900

Step 3: Journalizing in the book of Micron Precision.

Date	Particulars	$ Debit	$ Credit
1 Jan 2018	New equipment	3,900
	Accumulated depreciation	1,600
	Cash		2,100
	Old equipment		2,500
	Gain on sale		900
	(To record the exchange of assets)