Question

Equipment that cost $660,000 and has accumulated depreciation of $300,000 is exchanged for equipment with a fair value of $480,000 and $120,000 cash is received. The exchange lacked commercial substance.

The gain to be recognized from the exchange is
a. $48,000
b. $60,000
c. $180,000
d. $240,000

Answer 1

The gain to be recognized from the exchange is $60,000.

Step-by-step explanation:

The gain to be recognized from the exchange is $60,000.

In this exchange, the equipment with a cost of $660,000 and accumulated depreciation of $300,000 is being exchanged for equipment with a fair value of $480,000 and $120,000 cash is received. Since the exchange lacked commercial substance, the gain to be recognized is calculated as the fair value of the new equipment minus the book value of the old equipment (cost minus accumulated depreciation).

So, the gain is $480,000 - ($660,000 - $300,000) = $60,000.