Layne Co. has a machine that cost $255,000 on March 20, 2007.

This old machine had an

estimated life of ten years and a salvage value of $15,000. On December 23, 2011, the
old machine is exchanged for a new machine with a market value of $162,000. The
exchange lacked commercial substance. Layne also received $18,000 cash. Assume that
the last fiscal period ended on December 31, 2010, and that straight-line depreciation is
used.

Instructions
(a) Show the calculation of the amount of gain or loss to be recognized by Layne Co.
from the exchange. (Round to the nearest dollar.)
(b) Prepare all entries that are necessary on December 23, 2011. Show a check of the
amount recorded for the new machine.

(a) Cost $255,000

Accumulated depreciation (4 3/4 × $24,000) (114,000)
Book value 141,000
Fair value ($162,000 + $18,000) 180,000
Gain $ 39,000
Gain recognized (18/180 × $39,000) $ 3,900

(b) Depreciation Expense............................................................ 24,000

Accumulated Depreciation......................................... 24,000

Accumulated Depreciation..................................................... 114,000

Machine 126,900
Cash........................................................................................ 18,000
Machine...................................................................... 255,000
Gain on Disposal........................................................ 3,900
Check: Fair value $162,000
Deferred gain (35,100)
Basis of new machine $126,900