Melvin Motor Sales exchanged a car from its inventory for a computer to be used
ID: 2436019 • Letter: M
Question
Melvin Motor Sales exchanged a car from its inventory for a computer to be used as a noncurrent operating asset. The following information relates to this exchange that took place on July 31, 2011:Carrying amount of the car $30,000
Listed selling price of the car $45,000
Fair Value of the Computer $43,000
Cash difference paid b Melvin Motor $5,000
The exchange has commercial substance.
On July 31, 2011, how much profit should Melvin recognize on this exchange?
I think the answer is $8,000 ($43,000 - ($30,000 + $5,000)) But I'm confused abou the commercial substance.
Explanation / Answer
That's correct. The commercial substance part just means that it is not a nonmonetary exchange. If it were a nonmonetary exchange you would have to record it at the book value rather than the fair value (Note that in this case, only a fair value is given anyway so I think whoever made this question was being necessarily thorough).