Question

Calaveras Tire exchanged equipment for two pickup trucks. The book value and fair value of the equipment given up were $22,000 (original cost of $68,000 less accumulated depreciation of $46,000) and $18,000, respectively.

Assume Calaveras paid $9,000 in cash and the exchange has commercial substance.

(1) At what amount will Calaveras value the pickup trucks?

(2) How much gain or loss will the company recognize on the exchange?

Answer 1

(1) $27,000

(2) loss of $4,000

Step-by-step explanation:

(1) Since the exchange has commercial substance, Calaveras will value the pickup trucks at their fair value added to the cash payment:

`Value = \$18,000 + \$9,000\\Value = \$27,000`

(2) Calavera's recognized gain or loss in this exchange is given by the difference between the fair value and the book value of the original equipment:

`\$18,000 - \$22,000 = -\$4,000`

The company will recognize a loss of $4,000