Maverick Inc. exchanged an old vehicle for a new vehicle on August 31, 2017. The original cost of the vehicle was $45,000 on January 1, 2013. Depreciation was calculated using the straight-line method over a ten-year useful life, with an estimated residual value of $3,000. The fair value of the old vehicle on August 31, 2017 was $21,500. The list price of the new vehicle was $30,000. Maverick received a $24,000 trade in allowance from the dealership and paid $6,000 cash for the new vehicle. The new machinery should be recorded on Maverick's books at

Question

Quizplus · Accepted Answer

The cost basis for the old vehicle is $45,000 - $3,000 = $42,000. The vehicle has been depreciated for 4.67 (8/12 of 10 years) years as of August 31, 2017. The accumulated depreciation is therefore $42,000 / 10 years * 4.67 years = $19,554. The carrying value of the old vehicle is $42,000 - $19,554 = $22,446. Since the fair value of the old vehicle is $21,500, a loss of $946 is recognized. The cost of the new vehicle is $24,000 (list price) - $24,000 (trade-in allowance) + $6,000 = $6,000. Therefore, the new machinery should be recorded at $6,000 + $946 = $6,946, which is closest to answer B ($27,500).