Question

China Inn and Midwest Chicken exchanged assets. Midwest Chicken received equipment and gave a delivery truck. The fair value and book value of the delivery truck given were $31,000 and $32,600 (original cost of $37,000 less accumulated depreciation of $4,400), respectively. To equalize market values of the exchanged assets, Midwest Chicken received $9,000 in cash from China Inn.

At what amount did Midwest Chicken record the equipment?

Answer 1

Midwest Chicken recorded the new equipment at a total of $40,000, which is the combination of the fair value of the truck given up ($31,000) and the cash received ($9,000).

Step-by-step explanation:

Midwest Chicken recorded the equipment at the fair value of the delivery truck plus the cash received, which amounted to $40,000. This is the sum of the fair value of the truck ($31,000) and the cash received ($9,000).

In a non-monetary exchange like this one, when a company trades an asset and also receives cash (often referred to as "boot" in accounting terminology), the asset acquired is recorded at the fair value of what was given up plus the cash received. Therefore, the equipment received by Midwest Chicken is recorded at the fair value of the delivery truck given up, $31,000, plus the cash of $9,000.

Since the delivery truck has a book value of $32,600 (which includes accumulated depreciation), and the exchange is viewed to have commercial substance, the fair value is the more relevant measure. The record on Midwest Chicken's books for the equipment will therefore show an asset entry of $40,000.