Question

Metlock Inc. gave $10,000 cash and a piece of equipment to Sunland Inc. in exchange for a new machine. The exchange lacks commercial substance.

Equipment:

Historical Cost = $50,000

Accumulated Depreciation = $40,000

Fair Market Value = $30,000

Machine:

Historical Cost = $50,000

Accumulated Depreciation = $35,000

Fair Market Value = $40,000

What is Metlock's basis in the "new" machine?

Answer 1

Historical cost of equipment = 50000

Cash paid = 10000

Accumulated dep = 40000

Metlock's basis in new machine would be = 50000 + 10000 - 40000

= 20000

Journal entry will be-

Machine dr.   ............................20000

Acc dep. dr................................40000

            To cost - equipment......................50000

             To cash.........................................10000