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28 January, 10:20

Coronado Co. had a sheet metal cutter that cost $115,000 on January 5, 2016. This old cutter had an estimated life of ten years and a salvage value of $20,000. On April 3, 2021, the old cutter is exchanged for a new cutter with a fair value of $60,000. The exchange lacked commercial substance. Coronado also received $15,000 cash. Assume that the last fiscal period ended on December 31, 2020, and that straight-line depreciation is used.

Required:

(a) Show the calculation of the amount of the gain or loss to be recognized by Coronado Co.

(b) Prepare all entries that are necessary on April 3, 2021.

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Answers (1)
  1. 28 January, 12:04
    0
    a. Gain = $9,875

    b. The Journal entry is shown below:-

    Explanation:

    a. The computation of amount of the gain or loss to be recognized by Coronado Co. is shown below:-

    For computing the gain or loss first we need to follow some steps which is here below:-

    Depreciation per year under SLM = (Cost of the asset - Salvage value) : Life of the asset

    = ($115,000 - $20,000) : 10

    = $95,000 : 10

    = $9,500

    Depreciation from 2016 to 2020 = Depreciation per year under SLM * 5 years

    = $9,500 * 5

    = $47,500

    Here, the machine is sold on April 3 2021. So we will compute the 3 month depreciation for 2021

    Depreciation for 2021 = Depreciation per year under SLM * 3 months : Number of months in a year

    = $9,500 * 3 : 12

    = $2,375

    Accumulated Depreciation = Depreciation from 2016 to 2020 + Depreciation for 2021

    = $47,500 + $2,375

    = $49,875

    Book value = Costs - Accumulated Depreciation

    = $115,000 - $49,875

    = $65,125

    Fair value = $60,000 + $15,000

    = $75,000

    Gain = Fair value - Book value

    = $75,000 - $65,125

    = $9,875

    b. The Journal entry is shown below:-

    1. Depreciation expenses Dr, $2,375

    ($9,500 * 3 : 12)

    To accumulated depreciation $2,375

    (Being depreciation is recorded)

    2. Cash Dr, $15,000

    Machinery Dr, $60,000

    Accumulated depreciation Dr, $49,875

    To Machinery $115,000

    To Gain on disposal $9,875

    (Being Old equipment exchanged with new and receipt of cash is recorded)
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