Question

Sunland Company received $147000 in cash and a used computer with a fair value of $390000 from Blossom Company for Sunland Company's existing computer having a fair value of $537000 and an undepreciated cost of $507900 recorded on its books. The transaction has no commercial substance. How much gain should Sunland recognize on this exchange, and at what amount should the acquired computer be recorded, respectively?

$29100 and $390000

$1547 and $242147

$147000 and $507900

$0 and $360900

Answer 1

The correct answer is " $29,100 and $390,000".

Supporting calculations and explanations:

Cash received	$147,000
Add: Fair value of the computer received in exchange	$390,000
Total value of the benefit received in exchange	$537,000
Less: The book value of the old computer sold (undepreciated value)	($507,900)
Gain on the exchange	$29,100

For old computer sold, the undepreciated value or the book value should only be considered as the current fair value of the old computer is irrelevant to know the gain.

In case of new computer, the current fair value is the current cost so current fair value should be considered for the exchange.

Therefore, the new computer will be recorded at its current fair value of $390,000.

Hence, the correct answer is $29,100 and $390,000.