Terra Corporation purchased equipment with a 10-year useful life and zero residual value for $100,000. At the end of the fourth year, the equipment is exchanged for new equipment worth $110,000. Terra gets a trade-in allowance of $70,000 on the exchange, with the remaining $40,000 paid in cash. Which of the following is true of the net effect of this transaction? Assume the straight-line depreciation method is used.

Select all that apply and click Submit

Assets decrease by $10,000

Assets increase by $10,000

Liabilities increase by $10,000

Total stockholders' equity decreases by $10,000

Total stockholders' equity increases by $10,000

Question

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31 January, 23:37

Terra Corporation purchased equipment with a 10-year useful life and zero residual value for $100,000. At the end of the fourth year, the equipment is exchanged for new equipment worth $110,000. Terra gets a trade-in allowance of $70,000 on the exchange, with the remaining $40,000 paid in cash. Which of the following is true of the net effect of this transaction? Assume the straight-line depreciation method is used.

Select all that apply and click Submit

Assets decrease by $10,000

Assets increase by $10,000

Liabilities increase by $10,000

Total stockholders' equity decreases by $10,000

Total stockholders' equity increases by $10,000

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Answers (1)

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Jennifer Molina · Answer 1

Assets increase by $10,000

Total stockholders' equity increases by $10,000

Explanation:

To see impact of transcation mentioned in question on asset, liability and equity lets first begin with journal entry. Journal entry is given below.

Debit New Asset 110,000

Credit Cash Asset 40,000

Credit Old Asset 60,000*

Profit on disposal 10,000

*Old asset net book value = cost - accumlated depreciation

=100,000 - (4*10,000) = 60,000

So this is clear that the asset and equity will increase as result of transaction mentioned above them. There will no impact on liability.