The general entry for the exchange of fixed assets will be as follows.
Debit -Accumulated depreciation 3.5
Debit -New machine 7
Debit- Loss on exchange of machine 0.5
credit- Machine old machine 10
Credit- Cash paid 1
This requires derecognizing of old machine form the books of accounts along with its accumulated depreciation. And new machine will be recognized in the books of transaction. A loss on exchange of machines has been incurred due to excess net outflow of funds.
Working for the gain or loss on exchange will be as follows.
Cost of old machine 10
Less: Accumulated depreciation (3.5)
Book value of old machine 6.5
Addition of new machine (7)
Cash consideration paid 1
Loss on machine 0.5