Q7TI - Horngren'S Financial And Managerial Accounting

Question

Arca Salvage, Inc. purchased equipment for \(10,000. Arca recorded total depreciation of \)8,000 on the equipment. Assume that Arca exchanged the old equipment for new equipment, paying \(4,000 cash. The fair market value of the new equipment is \)5,000. Journalize Arca’s exchange of equipment. Assume this exchange has commercial substance.

Step-by-Step Solution

Answer

Equipment (new), Accumulated depreciation, and loss on disposal are debited by $5,000, $8,000, and $1,000, respectively, and new Equipment and cash are credited by $10,000 and $4,000, respectively.

Step 1: Meaning of Commercial Substance

Commercial substance refers to those business transactions that will affect the future outflows of the business.

Step 2: Showing Journal Entry

Date	Accounts	Debit ($)	Credit ($)
	Equipment(new)	5,000
	Accumulated depreciation-Equipment	8,000
	Loss on Disposal	1,000
	Equipment(old)		10,000
	Cash		4,000

Working note:

Market value of assets received	$5,000
Less:
Book value of asset exchanged             ($10,000 - $8000) = $2,000
Cash paid                                                                   4,000	6,000
Gain or (Loss)	($1000)