Question

An automobile costs $60,000 when new and has accumulated depreciation of $35,000. Suppose the automobile is exchanged for a new automobile. The new automobile has a market value of $70,000 and we pay $45,000 in cash. Assume the exchange has commercial substance. What is the result of this exchange?

(A) No gain or loss.
(B) Gain of $5,000
(C) Loss of $5,000
(D) Gain of $45,000

Answer 1

The correct answer here would be A) no gain or loss .

Step-by-step explanation:

As per the question it is given that the exchange has commercial substance , which means the automobile which cost $60,0000 and has accumulated depreciation of $35,000, will have the book value of $25,000 ( $60,000 - $35,000 ) .

Now the exchanged automobile has market value of $70,000, which means a total of $70,000 has to be given , so by exchanging the automobile we have paid $25,000 and then later by paying cash of $45,000, the full market value of $70,000 has been paid. So therefore there would be no loss or gain .