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

SOLUTION :

BOOK VALUE OF EQUIPMENT

Historical Cost $50,000

( Less ) Accumulated Depreciation ( $40,000 )

Book Value       $10,000

GAIN ON DISPOSAL

Fair Market Value Of Equipment        $30,000

(Less)   Book Value of Equipment ( $10,000)

Total Gain On Disposal     $20,000

Exchange lacks commercial substance & ( some cash recived, portion of gain realized)

Cash Receivied /   Cash Receivied + FV Of Other Asset Received * Total Gain

$10,000 / $10,000 + $40,000 * $20,000 = $4,000

Deferred Gain = $20,000 - $4,000 = $16,000

BASIS OF NEW MACHINE

Faire Value of Machine $40,000

(Less)     Deferred Gain $16,000

Basis of Machine $24,000