Question

XYZ company traded in equipment with accumulated depreciation of 65,000 (original cost 136,000) for 'like kind - lacks commercial substance' new equipment with a cash price of 175,000. XYZ received a trade-in allowance of 75,000 on the old equipment and paid 100,000 in cash. The book value of the old equipment is 71,000. What would the entry be for like kind and no like kind?

Answer 1

In a 'like kind - lacks commercial substance' exchange, no gain or loss is recognized if the trade-in allowance is greater than the book value of the old equipment. In a transaction without a 'like kind' component, a gain or loss is recognized based on the cash received minus the book value of the old equipment.

Step-by-step explanation:

Like Kind Exchange:

In a 'like kind - lacks commercial substance' exchange, the book value of the old equipment is compared to the trade-in allowance received. If the trade-in allowance is greater than the book value, no gain or loss is recognized. The new equipment is recorded at the fair value of the old equipment plus any additional cash paid.

No Like Kind Exchange:

In a transaction without a 'like kind' component, a gain or loss is recognized. The gain is calculated as the cash received minus the book value of the old equipment. The new equipment is recorded at its purchase price, which includes the cash paid.