Asked by Esther Sagoe on Jul 02, 2024
Verified
A company's old machine that cost $40,000 and had accumulated depreciation of $30,000 was traded in on a new machine having an estimated 20-year life with an invoice price of $50,000. The company also paid $43,000 cash, along with its old machine to acquire the new machine. If this transaction has commercial substance, the new machine should be recorded at:
A) $40,000.
B) $47,000.
C) $50,000.
D) $53,000.
E) $10,000.
Commercial Substance
A concept in accounting that refers to a transaction causing a significant change in the cash flows or financial status of a company.
Invoice Price
The price at which a seller lists a product for sale to a buyer, often detailed in a purchase invoice.
- Comprehend the economic consequences of asset disposal, including the identification of gains or losses.
Verified Answer
VM
Venessa Maduka6 days ago
Final Answer :
C
Explanation :
Since the transaction has commercial substance, the new machine should be recorded at fair value, which is the sum of the invoice price and the cash paid. Therefore, the new machine should be recorded at $50,000 + $43,000 = $93,000. The cost of the old machine and its accumulated depreciation should be removed from the books. Thus, the gain or loss on the exchange should be calculated by comparing the fair value of the new machine with the carrying amount of the old machine. As the carrying amount of the old machine is $10,000, there is a gain of $33,000 on the exchange.
Learning Objectives
- Comprehend the economic consequences of asset disposal, including the identification of gains or losses.
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