On May 15, 2016, January Company acquired a new forklift in exchange for an old forklift that it had acquired in 2006. The old forklift was purchased for $20,000 and had a book value of $5,000. On the date of the exchange, the old forklift had a market value of $6,000. In addition, Retread paid $18,000 cash for the new forklift, which had a list price of $25,000. It is expected that future cash flows will not change. At what amount should Retread record the new forklift for financial accounting purposes? $20,000 $25,000 $23,000 $24,000
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.
Exchange of assets:
When an old asset is exchanged for a new one along with some cash, it is called exchange of assets. However, for financial accounting purposes the commercial substance needs to be considered to determine the validity of such exchange.
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