Question

Questions:

Regarding Opeion 3, How do you get Equipment 70000?

Regarding Option 4, how do you get 22% and what does it mean?And how do you get Equipment 57000

Exercise 9 Exchange of Nonmonetary Assets: The Welch Company owns a machine used in the company’s operations. The machine cost $75,000 and has accumulated depreciation of $30,000 based on an accelerated depreciation method. Welch Company would like to purchase a newer machine to replace the existing machine and is considering several options. The machine owned by Welch Company has a fair (market) value of $55,000.

Based on the information given above, what is the gain on the disposal of the used machine? (Note: Welch Company may or may not be able to recognize this gain.)

            Book value = Cost – Accm Depr = $75,000 – 30,000 = $45,000

            Gain/loss = Fair value – Book Value = $55,000 – 45,000 = $10,000 gain

Required: Record the journal entry for the disposal under each of the following options.

SALE

Option 1: Welch Company can sell the used machine to a competitor for $60,000 cash. The company would then purchase a new machine from a dealer. Recognize gain?

Cash

55,000

Accm depreciation – equipment

30,000

       Gain in sale

10,000

       Equipment

75,000

NON-MONETARY EXCHANGE – COMMERCIAL SUBSTANCE (boot paid)

Option 3: Welch Company can exchange the used machine for a newer machine (currently being used by another company). The newer machine has a fair value of $70,000. Welch Company would have to pay $15,000 in cash. Assume the exchange has commercial substance. Is this a monetary exchange? Recognize gain?

Equipment (received-new)

70,000

Accm depreciation – equipment

30,000

       Gain on disposal (or exchange)

10,000

       Equipment (given-old)

75,000

       Cash

15,000

NON-MONETARY EXCHANGE – NO COMMERCIAL SUBSTANCE (boot paid)

Option 4: Welch Company can exchange the used machine for a newer machine (currently being used by another company). The newer machine has a fair value of $67,000. Welch Company would have to pay $12,000 in cash. Assume the exchange has no commercial substance. Is this a monetary exchange? Recognize gain? 12/67 = 22% nonmonetary

Equipment (received-new)

57,000

Accm depreciation – equipment

30,000

       Cash

12,000

       Equipment (given-old)

75,000

NON-MONETARY EXCHANGE – COMMERCIAL SUBSTANCE (boot received)

Option 5: Welch Company has also been approached by a competitor with a similar machine worth $50,000. The competitor has offered to pay $5,000 cash to Welch. Assume this exchange has commercial substance. Is this a monetary exchange? Recognize gain?

Equipment (received-new)

50,000

Accm depreciation – equipment

30,000

Cash

5,000

       Gain on disposal (or exchange)

10,000

       Equipment (given-old)

75,000

 

Cash

55,000

 

 

Accm depreciation – equipment

30,000

 

 

       Gain in sale

 

10,000

 

       Equipment

 

75,000

 



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