Question

On December 1, 2015, ABC Company acquired a new delivery truck in exchange for an old delivery truck that it had acquired in 2012. The old truck was purchased for $35,000 and had a book value of $13,300. On the date of the exchange, the old truck had a market value of $14,000. In addition, ABC paid $2000 cash for the new truck. The exchange lacked commercial substance. At what amount should ABC record the new truck for financial accounting purposes?

Answer 1

• There can be instances when an asset is exchanged for another Asset:

#1 where exchange transaction has commercial substance,

#2 where the exchange transaction lacks commercial substance.

• When exchange transaction lacks commercial transaction, no gain or loss is recognised by the company receiving the new asset.
• Answer:

A	Book value of the Old Truck exchanged	$                13,300
B	Cash Paid	$                   2,000
C = A+B	The new truck will be recorded at	$                15,300

Hence, the new Truck will be recorded at $ 15,300 by ABC company.

ABC will record following journal entry while exchanging the old truck for new:

Date	Accounts title	Debit	Credit
01-Dec-15	Truck [New]	$                15,300
	Accumulated Depreciation [old truck: 35000 - 13300]	$               21,700
	Truck [Old]		$                35,000
	Cash [paid]		$                   2,000
	(Asset exchanged, lacking commercial substance]