Final answer:
Harper should recognize a gain of $16,000 from the exchange of machines with Lubin. This is calculated by comparing the book value of Harper's machine ($64,000) with the fair value of the total received ($80,000). Hence, the correct answer is option (c).
Step-by-step explanation:
To calculate the gain that Harper should recognize on the exchange of machines with Lubin, we must first determine the book value of Harper's machine, which is the original cost minus accumulated depreciation.
The book value is therefore $162,500 - $98,500 = $64,000.
The fair value of Lubin's machine is given as $60,000. Harper is also receiving an additional $20,000 in cash.
The total fair value of what Harper is receiving is $60,000 (machine) + $20,000 (cash) = $80,000.
Since the exchange has commercial substance, the gain recognized would be the difference between the fair value of what is received and the book value of what is given up.
Thus, the gain would be $80,000 (total received) - $64,000 (book value) = $16,000.