Question

Lewis Company traded machinery with a book value of $950,000 and a fair value of $900,000. It received in exchange from Timmons Company a machine with a fair value of $1,000,000. Lewis also paid cash of $100,000 in the exchange. Timmons s machine has a book value of $950,000. What amount of gain or loss should Lewis recognize on the exchange (assuming lack of commercial substance)

Answer 1

Lewis should recognize a gain on the exchane of $13,636

Step-by-step explanation:

In order to calculate the amount of gain or loss should Lewis recognize on the exchange, first we have to determine the amount of gain with the followig formula:

Gain=Total value of the machine received-Book value of machine exchanged

=(cash received+fair value of machine received)- $950,000

=($100,000+$1,000,000)-$950,000

=$ 150,000

Next, In order to calculate the amount of gain or loss should Lewis recognize on the exchange we have to use the following formula:

recognize gain or loss=( cash received )× gain

cash received+fair value of equipment received

= ( $ 100,000 )× 150,000

$100,000+$1,000,000

=$13,636

Lewis should recognize a gain on the exchane of $13,636