Question

Equipment that cost $660,000 and has accumulated depreciation of $300,000 is exchanged for equipment with a fair vlaue of $480,000 and $120,000 cash is received. The exchange lacked commercial substance.

The new equipment should be recorded at ______.

a. $480,000.b. $360,000.c. $300,000.d. $288,000.

Answer 1

The correct answer is gain recognized option (a).

Step-by-step explanation:

According to the scenario, the given data are as follows:

Equipment cost = $660,000

Accumulated depreciation = $300,000

So, the book value of the equipment = Equipment cost - Accumulated depreciation

Book value = $660,000 - $300,000 = $360,000

New equipment fair value = $480,000

Cash = $120,000

So, New equipment = $480,000 + $120,000 = $600,000

So, we can calculate the total gain by using following formula:

Total gain = New equipment - Book value

= $600,000 - $360,000

= $240,000

So, gain recognized = Total gain × ( cash ÷ New equipment total)

By putting the value

Gain recognized = $240,000 × ( $120,000 ÷ $600,000)

= $240,000 × 0.2

= $48,000