Question

Equipment that cost $390,300 and has accumulated depreciation of $313,600 is exchanged for equipment with a fair value of $160,000 and $40,000 cash is received. The exchange lacked commercial substance. Calculate the gain to be recognized from the exchange. Gain recognized SHOW LIST OF ACCOUNTS Prepare the entry for the exchange. Show a check of the amount recorded for the new equipment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit Accumulated Depreciation-Equipment Equipment Cash 313,600 40,000 Equipment 390,300 Gain on Disposal of Equipment

Answer 1

Gain on equipment arises when the consideration received for the equipment is more than the book value of the equipment
Calculation of gain on equipment
Equipment received	$160,000
Cash received	$40,000
Total consideration		$200,000
Less : Book Value of equipment
Cost of equipment	$390,300
Less : Accumulated depreciation	$313,600
Book value of equipment		$76,700
Gain on equipment sold		$123,300
Journal entry for exchange
Account Titles and Explanation	Debit	Credit
Accumulated depreciation - Equipment	$313,600
Equipment	$160,000
Cash	$40,000
Equipment		$390,300
Gain on disposal of equipment		$123,300
(Being sale of equipment)
Explanation
The company has received equipment and cash and they being assets they are debited as their balance would increase.
The old equipment is sold and therefore balance of equipment would reduce and so it is credited
The gain on disposal of equipment is profit for the company and hence is credited.
The accumulated depreciation would be reversed and therefore it is debited