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On July 1, Twin Pines Co., a water distiller, acquired new bottling equipment with a list price (fair market value) of $220,000. Twin Pines received a trade-in allowance (fair market value) of $45,000 on the old equipment of a similar type and paid cash of $175,000. The following information about the old equipment is obtained from the account in the equipment ledger: cost, $180,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $120,000; annual depreciation, $12,000. Assuming that the exchange has commercial substance, journalize the entries to record (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on July 1.

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Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436

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BuyFindarrow_forward

Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436
Chapter 10, Problem 27E
Textbook Problem
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On July 1, Twin Pines Co., a water distiller, acquired new bottling equipment with a list price (fair market value) of $220,000. Twin Pines received a trade-in allowance (fair market value) of $45,000 on the old equipment of a similar type and paid cash of $175,000. The following information about the old equipment is obtained from the account in the equipment ledger: cost, $180,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $120,000; annual depreciation, $12,000. Assuming that the exchange has commercial substance, journalize the entries to record (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on July 1.

(a)

To determine

Journalize the current depreciation of the old equipment to the date of trade-in.

Explanation of Solution

Exchange of fixed assets: It refers to the purchase of new fixed assets in exchange of old fixed assets.

Commercial substance: It means that the exchange of the fixed asset cause changes in the future cash flows as more revenue will generate from the new fixed asset due to an increase in its productivity. Thus, if the revenue earned or expenses incurred changes in the future due to the exchange of fixed assets, then it will be referred as the exchange has a commercial substance.

Record the journal entry for current depreciation of the old equipment to the date of trade-in.

DateAccounts title and explanationPost Ref.

Debit

($)

Credit

($)

July 1Depreciation Expense-Equipment             (1) 6,000 
Accumulated depreciation – Equipment 6,000
 (To record the current depreciation expense.)   

Table (1)

Working note 1: Compute the current year depreciation on the date of exchange...

(b)

To determine

Journalize the exchange transaction on July 1.

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Financial Accounting
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