P35 REVIEW PROBLEM 6-3 Ocular Co.trades an electron microscope for new optical equipment and receives $30,000 cash as well. The old microscope had an original cost of $200,000 and has accumulated depreciation of $80,000 at the time of the trude. The old microscope has a fir value of $160,000 at trade in time. Required: 1. Assuming that the exchange does not have commercial substance, what entry is required to record the exchange? 2. Assuming that the exchange does have commercial substance, what entry is required to record the exchange? REVIEW PROBLEM 6-3-SOLUTION 1. Since there is no commercial substance to the transaction, the new equipment is recorded at the book value of the old equipment. minus the cash received 90,000 80,000 New optical equipment ($120,000 - $30,000) Accumulated depreciation-old equipment Cash Old Equipment 30,000 200,000 2. Since there is commercial substance, we start with determining the fair value of the asset that is given up. This appears to have a reliable fair value of $160,000. The new optical equipment will be recorded at $160,000 less the cash received of $30,000 for a net amount of $130,000. A gain on trade in is reported of $40,000 representing the difference between the old equipment's fair value of $160,000 and its net book value of $120,000. If the fair value of the new equipment is known, we just have to be sure that its fair value is equal to or higher than the $130,000 recorded. If not, the new equipment would have to be recorded at the lower fair-value amount 130,000 80,000 New optical equipment ($160,000 - $30,000) Accumulated depreciation-old equipment Cash Gain on trade in Old Equipment 30,000 40,000 200.000