Final answer:
In an exchange lacking commercial substance with a gain and cash received, the asset received is recorded at the book value of the asset given up less the cash received. This approach defers the gain recognition until the new asset is sold or disposed of. Option A. is correct answer.
Step-by-step explanation:
When dealing with an exchange that lacks commercial substance where a gain exists and cash is received, the accounting treatment can be a little complex. According to the accounting standards, the asset received should be recorded at the book value of the asset given up less any cash received. It is not at the fair value of the asset given up, that figure is only considered in the gain calculation.
Therefore, if a business trades an asset and receives another asset along with cash in an exchange that has no commercial substance, and a gain is present from the transaction, the asset received is recorded at the original book value of the asset surrendered minus the cash received. This entry effectively defers the gain that would otherwise be recognized if the exchange had commercial substance.
Consider this simple example: a company trades in an old piece of equipment with a book value of $20,000. It receives a new piece of equipment valued at $25,000 and $5,000 in cash.
The entry to record the new asset will be at the book value of the old asset ($20,000) minus the cash received ($5,000), which equals $15,000. The deferred gain of $5,000 (fair value of old equipment $25,000 less book value $20,000) is not immediately recognized in the financial statements.