Prepare the journal entries needed to record the exchange of automobiles.
Ray, Inc., purchased a new 2010 model automobile on 2010 December 31. The cash price of the new automobile was USD 28,080, from which Ray received a trade-in allowance of USD 4,320 for a 2008 model traded in. The 2008 model had been acquired on 2008 January 1, at a cost of USD 20,700. Depreciation has been recorded on the 2008 model through 2009 December 31, using the straight-line method, an expected four-year useful life, and an expected salvage value of USD 2,700. The exchange has commercial substance.
a. Record depreciation expense for 2010.
b. Prepare the journal entries needed to record the exchange of automobiles.