Question

A fixed asset with a cost of $42,000 and accumulated depreciation of $38,500 is traded for a similar asset priced at $60,000. Assuming the trade has no commercial substance and there is a trade-in allowance of $5,000, what is the cost basis of the new asset?

a) $58,000
b) $58,500
c) $60,000
d) $61,500

Answer 1

The cost basis of the new asset in a trade-in transaction is calculated by subtracting the trade-in allowance from the price of the new asset. Since the book value of the old asset is less than the trade-in allowance, no additional cash is paid, resulting in a cost basis of $55,000 for the new asset. There might be an error in the question or answer choices since this value is not listed among the options.

Step-by-step explanation:

The cost basis of the new asset in a trade-in transaction is determined by first accounting for the trade-in allowance received for the old asset and then adding any additional cash paid. The original cost of the old asset is $42,000 with an accumulated depreciation of $38,500, which leaves a book value of $3,500. When this old asset is traded in for the new one, a trade-in allowance of $5,000 is given. Generally, if a trade lacks commercial substance, the cost basis of the new asset is the book value of the old asset plus any additional cash paid. Here, since the trade-in allowance exceeds the book value of the old asset, no additional payment is needed for the transaction and the new asset's cost basis is the price of the new asset minus the trade-in allowance.

Therefore, the cost basis of the new asset ($60,000 price - $5,000 trade-in allowance) is $55,000. However, this is not among the provided answer options, suggesting there may be an error in either the question or answer choices provided.