Question

Use for questions 25 and 26 -- Below is information relative to an exchange of two pieces of equipment owned by Stanton Company with an unrelated company. The exchanges lack commercial substance.Book ValueFair ValueCash Paid for New Equipment Old Equipment I 75,000 85,000 15,000 Old Equipment II 50,000 45,000 7,000

26. Which of the following would be correct for Stanton to record the new equipment in the second exchange?Record New Equipment at: Record a gain of (loss) of:A.57,000 5,000 B.50,000 2,000C.52,000(5,000)D.50,000(2,000)

Answer 1

Generally, when the exchange lacks commercial substance, new assets is recorded at book value of old asset. Additionally, there is cash payment also in this case. Generally, in such conditions new asset will be recognised at carrying value of old asset plus cash paid. However, in second exchange, fair value is less than carrying value. Thus, actual value paid will be $45,000 plus $7,000 = $52,000. Carrying value of $50,000 will only be recognised. Thus, there is a loss of $2,000.

Answer:- D.50,000(2,000)