Novak Company purchased an electric wax melter on April 30, 2020, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase. List price of new melter $22,120 Cash paid 14,000 Cost of old melter (5-year life, $980 salvage value) 15,680 Accumulated Depreciation-old melter (straight-line) 8,820 Secondhand fair value of old melter 7,280 Prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Novak’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2019.
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.
Novak Company purchased an electric wax melter on April 30, 2020, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.
| List price of new melter | $22,120 | |
| Cash paid | 14,000 | |
| Cost of old melter (5-year life, $980 salvage value) | 15,680 | |
| 8,820 | ||
| Secondhand fair value of old melter | 7,280 |
Prepare the
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