On January 1,2013,Pastel Colors Corporation purchased drilling equipment for $11,500.The equipment has an estimated useful life of four years and a salvage value of $200.Assuming that Pastel Colors uses the straight-line method of depreciation,if it trades the equipment for new equipment with a list price of $15,500 on December 31,2014,and pays $4,050 in the exchange,assuming the exchange lacks commercial substance,the new equipment should be recorded at
A) $15,500.
B) $11,450.
C) $9,850.
D) $9,900.

Question

Quizplus · Accepted Answer

The book value of the drilling equipment on December 31, 2014, would be:
Cost of equipment - accumulated depreciation
= $11,500 - ($11,500/4) x 2
= $11,500 - $5,750
= $5,750
Since the exchange lacks commercial substance, the new equipment should be recorded at the book value of the old equipment, which is $5,750. However, since Pastel Colors also paid $4,050 in the exchange, the total cost of the new equipment would be $9,800 ($5,750 + $4,050). Therefore, the new equipment should be recorded at $9,900, as it is the closest value listed in the choices.

On January 1,2013,Pastel Colors Corporation Purchased Drilling Equipment for $11,500