Question

Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a cost of $160,000 and accumulated depreciation of $100,000. The new sailboat had an invoice price of $270,000. Hunter received a trade in allowance of $70,000 on the old sailboat, which meant the company paid $200,000 in addition to the old sailboat to acquire the new sailboat. If this transaction has commercial substance, what amount of gain or loss should be recorded on this exchange?

Answer 1

$10,000

Step-by-step explanation:

The computation of gain or loss is shown below:-

For computing the gain or loss first we need to find out the net book value of old sailboat and allowance of old sailboat which is below:-

Net book value of old sailboat = Cost of old sailboat - Accumulated depreciation

= $160,000 - $100,000

= $60,000

Allowance of old sailboat = Cost of new sailboat - Cash paid to new sailboat

= $270,000 - $200,000

= $70,000

Now,

Gain on exchange of old sailboat = Allowance of old sailboat - Net book value of old sailboat

= $70,000 - $60,000

= $10,000