Question

Carla Vista Co. traded machinery with a book value of $580000 and a fair value of...

Carla Vista Co. traded machinery with a book value of $580000 and a fair value of $970000. It received in exchange from Sheridan Company a machine with a fair value of $873000 and cash of $97000. Sheridan’s machine has a book value of $921500. What amount of gain should Carla Vista recognize on the exchange (assuming lack of commercial substance)?

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Answer #1

Gain recognized

$39,000

Workings:

Book value of Carla Vista’s Machinery = $580,000

Fair value of Carla Vista’s Machinery = $970,000

Total Gain = Fair value of Carla Vista’s Machinery - Book value of Carla Vista’s Machinery

= $970,000 - $580,000

= $390,000

Cash Received (Boot) % = Cash received / (Cash received + Fair value of Sheridan Company’s Machinery)

= 97,000 / (97,000 + 873,000)

= 97,000 / 970,000

= 10%

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) %

= $390,000 x 10%

= $39,000

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