A business exchanges an old machine for a new one. The old machine cost £30,000 and had accumulated depreciation of £21,000. The supplier gives a part-exchange allowance of £12,000 and the business pays the remaining £28,000 in cash for the new machine. At what cost is the new machine recorded?

Answer and explanation

Correct answer: A. £40,000

  1. Step 1: The part-exchange allowance is treated as proceeds for the old machine, and the new machine's cost is the cash plus the allowance.
  2. Step 2: Cost = £28,000 cash + £12,000 allowance = £40,000.
  3. Step 3: The disposal gives a profit of £12,000 − (£30,000 − £21,000) = £3,000 on the old machine.
Answer
£40,000.
Why not the others: £28,000: This records only the cash paid and ignores the £12,000 allowance, which is part of the purchase price. £37,000: This uses the £9,000 net book value of the old machine as the allowance instead of the agreed £12,000. £49,000: This adds the old machine's accumulated depreciation of £21,000 to the cash paid, which has no bearing on the cost of the new asset.

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