Question

Stanton exchanged its old equipment for a new equipment:  

            Book Value     Fair Value       Cash Paid

Case I  $300,000         $340,000         $60,000

Case II $200,000         $180,000         $28,000

Stanton records the following items in Case I (with and without C.S.)?

            Record the new equipment at:                                  Record a gain of (loss) of:

Stanton records the following items in Case II (with and without C.S.)?

            Record the new equipment at:                                  Record a gain of (loss) of:

Answer 1

When exchange lacks commercial value then the value of asset i.e. equipment and gain or loss is recorded as follows:

CASE I)

Since the FV (Fair value) is greater than the BV (book value) then gain or profit is not recognized and the asset is recorded as the total of book value of the asset and the cash paid for such asset.

Thus,

Amount recorded as equipment = Book Value + Cash paid

                                                   = $300,000 + $60000

                                                   = $360000

Gain = $0

Because gain is not recognized as it is still unrealized and as per conservative approach, only loss is recognized, unrealized gain is not recognized.

CASE II)

Since the Fair value (FV) is lower than the Book value of the asset and thus it incurs loss. So, loss need to be recognized and the asset is recorded as the total of fair value and cash paid for the asset.

Thus,

Amount recorded as equipment = Fair Value + Cash paid

                                                   = $180000 + $28000

                                                   = $201,000

Loss = Book value – Fair value

         = $200000 – $180000

         = $20000