Long-Term Asset Acquisition

Bruce and Emmett (B & E) is considering a significant equipment replacement. B & E would like to replace some of their equipment before December 31, 2019. The equipment originally cost $500,000 and the equipments accumulated depreciation balance at the end of 2019 is will be $450,000. At this point the equipment is depreciated to its salvage value.

Your long-term asset accountant, Boris, tells you about the option to exchange the old equipment for new equipment that is more efficient,

The estimated life of any new equipment is 5 years.

All loans would start as of January 1, 2019

B & E would like you to analyze the option to determine the financial impact of the decision and any non-financial considerations that may result from each decision. Additional information about each option is presented below:

Option: Exchange the equipment for a similar piece of equipment with a fair value of $600,000. The fair value of the old equipment is $60,000. B & E can borrow $540,000 on a one-year, 10% note. the balance will be funded with an accounts payable arrangement with the supplier. (Assume the exchange has commercial substance.)

Instructions

1. Prepare journal entries in general journal form for each of the four options.
2. Write a brief memo on how each option affects the financial statements. Include your journal entry(ies) in the body of your memo for each option. Discuss the strengths and weaknesses of each option.