INTERMEDIATE ACCOUNTING 1

ABC Limited acquired an alphabet machine on April 1, 2017 for $57,500 that created lower-case letters for outside signs. It estimated a useful life of 12 years with a residual value of $4,600.

On April 1, 2018, a custom extension was added to the machine which cost $8,100. This increased its useful life from the original 12 years to 14 years. Residual value is changed to $3,000 at the end of the 14 years.

On April 1, 2020, ABC Limited purchased a new alphabet machine with a market value of $63,800 that created upper-case letters as well as lower-case letters. As part of this trade, the company paid $14,800 in cash to obtain the new machine.

Assume a Dec 31 year end. The company uses straight line depreciation method.

Additional information relating to the alphabet machines are as follows:

New asset Old asset Market Value on April 1, 2020 $65,800 $48,500

a. What was depreciation for each year from the purchase date to sale date (for 2017, 2018, 2019 and 2020) on the old machine? Show calculations.

b. Record the journal entry to record the trade transaction on April 1, 2020 and assume there is commercial substance.