Martin Co. had a sheet metal cutter that cost $96,000 on January 5, 2002. This old cutter had an estimated life of ten years and a salvage value of $16,000. On April 3, 2007, the old cutter is exchanged for a new cutter with a market value of $48,000. The exchange lacked commercial substance. Martin also received $12,000 cash. Assume that the last fiscal period ended on December 31, 2006, and that straight-line depreciation is used.
(a) Show the calculation of the amount of the gain or loss to be recognized by Martin Co.
(b) Prepare all entries that are necessary on April 3, 2007. Show a check of the amount recorded for the new cutter.
The solution explains journal entries relating to Non-monetary Exchange