Acompany's old machine that cost $30,000 and had accumulated depreciation of $22,500 was traded in on a new machine of like purpose having an estimated 20-year life with an invoice price of $38,500. the company also paid $33,000 cash, along with its old machine to acquire the new machine. assuming that this transaction has commercial substance, the new machine should be recorded at

The machine will be recorded at 38,500

Explanation:

First we work the old machine numbers

traded-out

purchased        30,000

depreciation        (22,500)

book value          7, 500

fair value          5,500  (A)

loss on disposal  2, 000 (diference between book value and fair value)

(A) the invoice has a cost 38,500 we paid 33,000 cash so the value of the old machine on this trasaction was 5,500

The transaction has commercial substance so we recognize the new machine at his fair value and recognize the loss on dispossal

This would be the journal entry :

machine              38,500 the machine enter the accounting at fair value

acc dep                22,500

loss on disposal    2,000 we recognize the loss on disposal

    machine                          30,000

    cash                                 33,000

one of the appeals of a sole proprietorship is that business expenses are kept separate from your personal income tax return

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