Question

On December 31, Slugger Batting Cages Company decides to trade in one of its batting cages for another one that has a cost of $500,000. The seller of the batting cage is willing to allow a trade-in amount of $12,000. The initial cost of the old equipment was $225,000 with an accumulated depreciation of $195,000. Depreciation has been taken up to the end of the year. The difference will be paid in cash. What is the amount of the gain or loss on this transaction?

Answer 1

$0 as the entire difference is paid in cash no gain or loss has been incurred.

Step-by-step explanation:

Net cost of new equipment = $500,000 - $12,000 (Trade Discount) = $488,000

Value of old equipment = $225,000 - $195,000 = $30,000

Since the entire difference is to be paid in cash, that is $488,000 - $225,000 = $263,000

But since depreciation has been considered therefore the value to be paid in cash = $448,000 - $30,000 = $418,000

Thus there is no gain or loss, as entire difference is paid in cash.

Cost will be $448,000

In case if the asset would have been exchanged at cost of old asset there would have been gain of $225,000 - $30,000 (Current book value) = $195,000.

Final Answer

$0 as the entire difference is paid in cash no gain or loss has been incurred.