Question 7.p.1: The Hubbard Company owns a machine that was purchased on Jan...
The Hubbard Company owns a machine that was purchased on January 1, 2xx1, at a cost of $10,000. The machine has been depreciated on a straight-line basis with a useful life of six years and expected salvage value of $1,000. On January 1, 2xx5, the machine is traded in for a new machine with a list price of $20,000.
The company receives a trade-in allowance for the old machine of $1,200, which is estimated to be its fair market value at that time. The new machine has an expected useful life of ten years with no salvage value and will be depreciated by using the straight-line method.
Assuming the use of federal income tax procedures, prepare journal entries to record the exchange of machines on January 1, 2xx5. Prepare a journal entry to record depreciation of the new machine on December 31, 2xx5.
With federal income tax procedure, no gain or loss is recognized on the exchange.
However, this affects the cost basis of the new machine.
The January 1, 2xx5 entry would be:
Machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,300
Old Machine—Accumulated Depreciation . . . . . . . . . 7,500
Old Machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,800
To record trade-in of machine for new machine.
Since the cost recognized is $21,300, the annual depreciation charges would be:
\frac{\$21,300}{10}=\$2.130.
The December 31, 2xx5 entry would be:
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 2,130
New Machine—Accumulated Depreciation . . . . . . . . . 2,130