Question

Harper is contemplating exchanging a machine used in its operations for a similar machine on May 31. Harper will exchange machines with either Austin Corporation or Lubin Company. The data relating to the machines are presented below. Assume that the exchanges would have commercial substance.

Harper
Austin
Lubin
Original cost of the machine
H - $162,500
A - $180,000
L - $150,000
Accumulated depreciation thru May 31
H - 98,500
A - 70,000
L - 65,000
Fair value at May 31
H - 80,000
A - 95,000
L - 60,000
If Harper exchanges its used machine and $15,000 cash for Austin's used machine, the gain that Harper should recognize from this transaction for financial reporting purposes would be:
a) $0
b) $2,526
c) $15,000
d) $16,000

Answer 1

The gain that Harper should recognize from exchanging its used machine and $15,000 cash for Austin's used machine is $16,000.Option D is the correct answer.

Step-by-step explanation:

When Harper contemplates exchanging a machine for a similar one with either Austin Corporation or Lubin Company, we must calculate the gain or loss for financial reporting. We determine this by comparing the book value of Harper's machine to the fair value of what they receive. Harper's machine has a book value of $162,500 (original cost) minus $98,500 (accumulated depreciation), which equals $64,000. If Harper exchanges its machine plus $15,000 cash for Austin's machine valued at $95,000, we compare Harper's book value of $64,000 plus the cash of $15,000 to Austin's fair value of $95,000.

The transaction looks like this: Harper's Machine Book Value ($64,000) + Cash ($15,000) = Total Value ($79,000). Since the fair value of Austin's machine is $95,000, Harper would be trading something worth a total of $79,000 for something worth $95,000. This results in a gain of $16,000 for Harper ($95,000 - $79,000).

Therefore, the correct answer is: d) $16,000.