You have been asked to account for a plant asset exchange on the books of the Ecara Video Game Company. On January 1, 2010, Ecara acquired a plastic extruding machine at a cost of $ 260,000. This machine had an original estimated useful life of 10 years and a scrap value of $ 20,000. The machine was depreciated using the straight- line method. On August 1, 2015, Ecara exchanged the old machine for a similar asset with a market value of $ 157,250. Ecara also received cash of $ 27,750. The estimated fair value of the old machine is equal to $ 185,000. The old machine was depreciated up to December 31, 2014.
Required
a. Determine the gain or loss to be recognized on the exchange for Ecara assuming that the exchange has commercial substance after bringing the accumulated depreciation up to the date of the transaction.
b. Prepare all journal entries required on August 1, 2015, for Ecara.
c. Prepare the journal entry for Ecara to record the exchange, if the exchange lacked commercial substance.