Question

A fixed asset with a cost of $22,535 and accumulated depreciation of $20,282 is traded for a similar asset priced at $60,652. Assuming a trade-in allowance of $5,605, the cost basis of the new asset in a transaction with commercial substance is

a. $60,652
b. $3,352
c. $16,930
d. $5,605

Answer 1

a. $60,652

Step-by-step explanation:

Gain of exchange of similar fixed assets cannot be recognized until new asset's cost is adjusted which will reflect the gain.

Book value = Cost - Accumulated depreciation = $22,535 - $20,282 = $2,253

Gain = Trade in Allowance - Book value = $5,605 - $2,253 = $3,352

Cost of new asset = Price of new asset - unrealized gain = $60,652 - $3,352 = $57,300

$60,652 basis used with commercial substance