Question

Assigning Value to Assets in Nonmonetary Exchange with Commercial Substance

Mariot Inc. trades its old equipment for new equipment with a $6,000 fair value. Mariot paid $3,500 cash on the exchange.

Original cost of old equipment		$5,000
Accumulated depreciation on old equipment		4,000

If the transaction has commercial substance, what amount does Mariot assign to the new equipment?

Amount assigned to new equipment

?????

Answer 1

Amount assigned to new equipment:-

Fair value of old equipment : $3500

Cash paid in exchange : $3500

Amount assigned to new equipment:- 3500+ 3500 - $ 7000

Note: as the fair value of new equipment is $ 6000 so we have to make adjustment (gain) in old equipment equal to $ 1000 (7000-6000).

Working

Calculation of fair value of old equipment:

Original cost of equipment : $5000

Accumulated Depreciationl : $4000

Book value : 5000-4000= $1000

Exchange value of old equipment: Fair value - cash paid

= 6000- 3500 = $2500

So fair value of old equipment : book value of old equipment + echange value

= 1000+2500 =$ 3500