Calaveras Tire exchanged machinery for two pickup trucks. The book value and fai

Question

Calaveras Tire exchanged machinery for two pickup trucks. The book value and fair value of the machinery were $24,000 (original cost of $71,000 less accumulated depreciation of $47,000) and $30,000, respectively. To equalize fair values, Calaveras paid $5,000 in cash.

Assume the exchange lacks commercial substance. How much gain or loss will the company recognize on the exchange?

Calaveras Tire exchanged machinery for two pickup trucks. The book value and fair value of the machinery were $24,000 (original cost of $71,000 less accumulated depreciation of $47,000) and $30,000, respectively. To equalize fair values, Calaveras paid $5,000 in cash.

Explanation / Answer

Hi,

Please find the detailed answer as follows;

Part A:

Value of Pickup Trucks = Fair Value of Machinery + Cash Paid = 30000 + 5000 = 35000

Part B:

Gain or Loss Recognized on the Exchange = 24000 (Book Value) - 30000 (Fair Value) = -6000

Loss on Exchange = -6000

Thanks.

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