Question

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values.

The exchange has commercial substance.
As a consequence of the exchange, Sable recognizes

A. A gain equal to the difference between the fair value and carrying amount of the truck given up.
B. A gain determined by the proportion of cash received to the total consideration.
C. A loss determined by the proportion of cash received to the total consideration.
D. Neither a gain nor a loss

Answer 1

A gain equal to the difference between the fair value and carrying amount of the truck given up.

Step-by-step explanation:

With commercial substance, the exchange is measured at fair value. The full gain is recognized and is equal to the difference between the fair value of the asset given up and its book value.

For example, assume the following values: new asset fair value 20, old asset fair value 26, cash received 6, old asset cost 30, old asset accumulated depreciation 9. The full entry is: dr. New Truck 20; dr. Accumulated Depreciation 9; dr. Cash 6; cr. Old Truck 30; cr. Gain 5.

The gain equals the old asset's fair value of 26 and its book value of 21 (30 - 9).