Q41PGB - Horngren'S Financial And Managerial Accounting

Question

During 2018, Lora Company completed the following transactions:

 

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of \)129,000 and accumulated depreciation of \(74,000) for new equipment. Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000. Assume the exchange had commercial substance.

 

Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000 through December 31 of the preceding year). Lora received \)7,100 cash from the sale of the equipment. Depreciation is computed on a straightline basis. The equipment has a five-year useful life and a residual value of \(0.

 

Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balance method over four years with a \)7,000 residual value.

 

Record the transactions in the journal of Lora Company.

Step-by-Step Solution

Answer

Gain on exchange: $6,000

Loss on sale: $3,300

Depreciation on office equipment: $54,500

Step 1: Journal entry for exchange of assets

Date	Particular	Debit	Credit
Jan 1.	Office Equipment (New)	$ 116,000
	Accumulated Depreciation – Office equipment	74,000
	To Office Equipment (Old)		$ 129,000
	To Cash		55,000
	To Gain on exchange		6,000
	Being office equipment exchanged with gain

Working:

$\begin{array}{rcl}\mathrm{Gain} \mathrm{on} \mathrm{exchange}& =& \mathrm{Fair} \mathrm{value} \mathrm{of} \mathrm{new} \mathrm{equipment}-\mathrm{Book} \mathrm{value} \mathrm{of} \mathrm{old} \mathrm{equipment}-\mathrm{Cash} \mathrm{paid}\\ & =& \$116,000-\left(\$129,000-\$74,000\right)-\$55,000\\ & =& \$6,000\end{array}$

Step 2: Journal entry for selling equipment

Date	Particular	Debit	Credit
Apr 1.	Cash	$ 7,100
	Accumulated Depreciation – equipment	1,600
	Loss on sale of equipment	3,300
	To Equipment		$ 12,000
	Being office equipment exchanged with gain

Working:

$\begin{array}{rcl}\mathrm{Depreciation} \mathrm{for} \mathrm{current} \mathrm{year}& =& \frac{\mathrm{Cost}-\mathrm{Residual} \mathrm{Value}}{\mathrm{Useful} \mathrm{life}}\times \frac{\mathrm{Months} \mathrm{in} \mathrm{use}}{12}\\ & =& \frac{\$12,000-\$0}{5}\times \frac{3}{12}\\ & =& \$600\end{array}$

Step 3: Journal entry for depreciation adjustment

Date	Particular	Debit	Credit
Dec 31.	Depreciation Expense – Office equipment	$ 54,500
	To Accumulated Depreciation – equipment		$ 54,500
	Being depreciation charged on office equipment

Working:

$\begin{array}{rcl}\mathrm{Depreciation} \mathrm{expense}& =& \frac{\mathrm{Cost}-\mathrm{Residual} \mathrm{value}}{\mathrm{Useful} \mathrm{life}}\times 2\\ & =& \frac{\$116,000-\$7,000}{4}\times 2\\ & =& \$54,500\end{array}$