Question

Busytown Corporation, which manufactures shoes, hired a recent college graduate to work in its accounting department. On the first day of work, the accountant was assigned to total a batch of invoices with the use of an adding machine. Before long, the accountant, who had never before seen such a machine, managed to break the machine. Busytown Corporation gave the machine plus $3000 to Tracy Business Machine Company (dealer) in exchange for a new machine. Assume the following information about the machines.

		Busytown Corp. (Old Machine)			Tracy Co. (New Machine)
Machine cost		$4500			$3000
Accumulated depreciation		2250			?0?
Fair value		4500			7500

What is the value of the newly acquired asset?

What would the company report gain (loss) on this asset exchange?

Answer 1

1) New assets acquired will be reported at the fair value of the assets given up plus any cash paid.

Fair value of machine given up $4500

Plus: Cash paid $3000

Machine cost (basis) $7500

So, the value of the newly acquired asset is $7500

2) Gain (loss) on the asset exchange is :

Fair value of the machine given up $4500

Less: Book value of machine:

Cost: $4500

Accumulated depreciation: ($2250)

Book value ($2250)

Gain on disposal $2250

Company would report a gain of $2250 on this asset exchange.