Cheng corporation exchanges old equipment for new equipment. the original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $40,000. the new equipment received had a fair value of $40,000 and a book value of $35,000. the journal entry to record this exchange will include which of the following entries?

Cr Equipment90000

Db Depreciation   40000  

Db Equpment Book value35000  

Db Loss on exchange of equipment  15000  

Explanation:

Fair Value Vs. Book Value. Typically, fair value is the current price for which an asset could be sold on the open market. Book value usually represents the actual price that the owner paid for the asset.

Original cost90000  

Depreciation40000  

Net Book value50000  

Fair value40000  

Book Value35000  

Cr Equipment90000

Db Depreciation   40000  

Db Equpment Book value35000  

Db Loss on exchange of equipment  15000  

The question is incomplete. There are no options to select from. In any case, the journal entries which would be recorded are as follows:

Option 1: separate  entries

Entry 1:

Debit Accumulated depreciation- Equipment(old) $40,000

       Credit Equipment(old)                                         $40,000

Entry 2:

Debit Equipment (new)                                        $40,000

Debit Loss on disposal                                        $10,000

            Credit Equipment(old)                                      $50,000                

Option 2: combined journal entry

Debit Accumulated Depreciation-Equipment(old)  $40,000

Debit Equipment (new)                                              $40,000

Debit Loss on disposal                                               $10,000

            Credit Equipment(old)                                          $90,000

Explanation:

Cheng corporation exchanged traded in old equipment for new equipment. Firstly, the substance (or reason for) the transaction must be established. In this case, Cheng Corporation anticipates to generate future cash flows from this trade in arrangement making this a commercial exchange. In a commercial exchange, the asset received is recorded at fair value. Fair value is the price attached to an asset by market forces of demand and supply.

The journal entries after this exchange are as follows:

First entry: close off accumulated depreciation against the asset to determine book value at date of the exchange:

Debit Accumulated depreciation- Equipment(old) $40,000

       Credit Equipment(old)                                         $40,000

After the first journal entry, equipment value in cost account is $50,000($90,000-$40,000)

Second entry: recognise new asset and any gains or losses at the exchange date

Debit Equipment (new)                                  $40,000

Debit Loss on disposal                                  $10,000

            Credit Equipment(old)                                      $50,000