Metlock Company purchased an electric wax melter on April 30, 2017, by trading i
ID: 2511267 • Letter: M
Question
Metlock Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.
Prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Metlock’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
No.
Account Titles and Explanation
Debit
Credit
(a)
Exchange has commercial substance:
(To record current depreciation.)
(To record exchange of the equipment.)
(b)
Exchange lacks commercial substance:
(To record current depreciation.)
(To record exchange of the equipment.)
List price of new melter $19,908 Cash paid 12,600 Cost of old melter (5-year life, $882 salvage value) 14,112 Accumulated Depreciation-old melter (straight-line) 7,938 Secondhand fair value of old melter 6,552Explanation / Answer
a & b) Depreciation Expense for the old melter for 2017 = [(Cost - Salvage Value)/Useful life]*4/12 (upto 30 April)
= [($14,112 - $882)/5 yrs]*4/12 = $882
Journal Entries (Amounts in $)
No. Account Titles and Explanation Debit Credit a) Exchange has commercial substance: Depreciation Expense 882 Accumulated Depreciation-Old Melter 882 (To record current depreciation) Melter (New) (Cash paid $12,600+Secondhand fair value of old melter $6,552) 19,152 Accumulated Depreciation-Old Melter ($7,938+$882) 8,820 Gain on disposal of Melter (Bal fig) ($19,152+$8,820-$14,112-$12,600) 1,260 Meter (Old) (cost) 14,112 Cash 12,600 (To record exchange of the equipment) b) Exchange lacks commercial substance: Depreciation Expense 882 Accumulated Depreciation-Old Melter 882 (To record current depreciation) Melter (New) 19,152 Accumulated Depreciation-Old Melter ($7,938+$882) 8,820 Gain on disposal of Melter (Bal. fig) 1,260 Meter (Old) 14,112 Cash 12,600 (To record exchange of the equipment)