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Iniesta Company traded machinery with original cost of $220,000 and accumulated depreciation of $30,000. It received...

Iniesta Company traded machinery with original cost of $220,000 and accumulated depreciation of $30,000. It received in exchange from Xavi Company a machine with a fair value of $200,000. Iniesta also paid cash of $20,000 in the exchange. Xavi’s machine has a book value of $190,000. What amount of gain or loss should Iniesta recognize on the exchange assuming the transaction lacks commercial substance?

i know the answer, but please explain.

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Answer #1

When a Transaction Lacks Commercial Substance, The Recording of the Transaction is Done Through Fair Value Approach.

In the Above Question we have Provided that Iniesta Company Exchanged a Machine which is Having a Book value of 190000(220000-30000) by Xavi Company which has Fair Market Value of 200000 along with cash of 20000/-. So, in this case the Total Value of Asset Received by Iniesta Company will be 220000/-.

Hence , There will be a Gain of 30000(220000-190000)

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