When a company exchanges machinery and receives a trade-in allowance greater than the book value,this transaction would be recorded with which of the following entries assuming the exchange was considered to have commercial substance?
A)debit Machinery and Accumulated Depreciation; credit Machinery,Cash,and Gain on Exchange of Machinery
B)debit Cash and Machinery; credit Accumulated Depreciation and Machinery
C)debit Machinery and Accumulated Depreciation; credit Machinery and Cash
D)debit Cash and Machinery; credit Accumulated Depreciation

Question

Quizplus · Accepted Answer

When a company receives a trade-in allowance greater than the book value, it means that they are receiving more than what the machinery is worth on their books. This results in a gain on the exchange, which needs to be recorded. The debit to Machinery and Accumulated Depreciation will remove the old machinery from the books, and the credit to Machinery and Cash will record the new machinery and any cash received. The gain on the exchange is recorded as a credit to recognize the increase in value.

When a Company Exchanges Machinery and Receives a Trade-In Allowance