Fenner Co. purchased a lathe machine for $72,000 on January 5, 2013. This (old) lathe had an estimated life of ten years and salvage value of $12,000. On April 3, 2020, the old lathe was exchanged for a similar lathe (in an exchange with no commercial substance) with a list price of $45,000. Fenner also paid $9,000 cash. The old lathe had a fair market value of $34,000 on April 3, 2020. Assume that the last fiscal period ended on December 31, 2019, and that straight-line depreciation is used on the basis of nearest full month. Compute the book/carrying value of the old lathe on April 3, 2020. Compute the gain (loss) on disposal booked by Fenner Co. on April 3, 2020. Prepare the journal entry made by Fenner Co. on April 3, 2020, to record the exchange of assets. Now assume that the fair market value of the old lathe on April 3, 2020, is $26,000 instead. Compute the gain (loss) on disposal booked by Fenner Co. on April 3, 2020.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Fenner Co. purchased a lathe machine for $72,000 on January 5, 2013. This (old) lathe had an estimated life of ten years and salvage value of $12,000. On April 3, 2020, the old lathe was exchanged for a similar lathe (in an exchange with no commercial substance) with a list price of $45,000. Fenner also paid $9,000 cash. The old lathe had a fair market value of $34,000 on April 3, 2020. Assume that the last fiscal period ended on December 31, 2019, and that straight-line
- Compute the book/carrying value of the old lathe on April 3, 2020.
- Compute the gain (loss) on disposal booked by Fenner Co. on April 3, 2020.
- Prepare the
journal entry made by Fenner Co. on April 3, 2020, to record the exchange of assets. - Now assume that the fair market value of the old lathe on April 3, 2020, is $26,000 instead. Compute the gain (loss) on disposal booked by Fenner Co. on April 3, 2020.
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