Question

A fixed asset with a cost of $30,105 and accumulated depreciation of $27,095 is traded for a similar asset priced at $69,349. Assuming a trade-in allowance of $4,597, the cost basis of the new asset in a transaction with commercial substance is

Select the correct answer.

$4,597

$25,508

$1,587

$69,349

Mobile Co. issued a $43,955, 60-day, discounted note to Guarantee Bank. The discount rate is 9%. At maturity, assuming a 360-day year, the borrower will pay:

Select the correct answer.

$43,955

$44,614

$43,296

$39,999

Answer 1

1.The cost basis of new asset can be computed as:

The gains made on the exchange of similar fixed asset are not recognized.Rather the new asset's cost is adjusted to depict the gain as given below:

Book value=$3,010(cost -accumulated depreciation; $30,105-$27,095)

There is a gain of=$1,587(trade allowance-book value; $4,597-$3,010)

Cost of the new asset=(list price-unrecognized gain)

cost of the new asset=$69,349-$1,587

cost of the new asset=$67,762

or we can say

cost of the new asset=cash paid +book value of old asset

cost of the new asset=($69,349-$4,597)+$3,010

cost of the new asset=$64,752+$3,010

cost of the new asset=$67,762

2.The amount paid by borrower will be calculated as:

Interest=$43,955*9%*60/360

Interest=$659

Issue price=$43,955-$659

Issue price=$43,296

Thus,the amount paid by borrower is $43,296.