Equipment that cost $398,100 and has accumulated depreciation of $318,900 is exchanged for equipment with a...

Equipment that cost $398,100 and has accumulated depreciation of $318,900 is exchanged for equipment with a fair value of $160,000 and $40,000 cash is received. The exchange lacked commercial substance.

(a)

Calculate the gain to be recognized from the exchange.

Gain recognized

Solutions

Expert Solution

Gain recognized

$24,160

Workings:

Carrying value of Old Equipment = Cost – Accumulated Depreciation

= $398,100 - $318,900

= $79,200

Fair value of new equipment = $160,000

Cash received = $40,000

Total Gain = Fair value of new equipment + Cash received - Carrying value of Old Equipment

= $160,000 + $40,000 - $79,200

= $120,800

Cash Received (Boot) % = Cash received / (Cash received + Fair value of new equipment)

= 40,000 / (40,000 + 160,000)

= 20%

Since the cash boot is less than 25%, the entire gain cannot be recognized. So, the gain amount that will be recognized can be calculated as follows:

Gain recognized = Total gain x Cash Received (Boot) %

= $120,800 x 20%

= $24,160

ekkarill92 answered 10 months ago

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