[forever_studying96]

This is one of the AICPA 2019 FAR released questions.

Can someone please explain how they get the 135,000 as the cost of the new machine? I understand how they get the 10,000 loss (BV 100,000 – FV 90,000)… but I don’t understand where the 135,000 is coming from.

Question:

On December 31, year 1, JM Co. exchanged a used machine for a new machine from DP, Inc. The
used machine had a book value of $100,000 ($120,000 cost minus $20,000 accumulated depreciation)
and a fair value of $90,000. The new machine had a list price of $150,000, and DP gave JM a trade-in
allowance of $105,000, with the difference paid in cash. The exchange has commercial substance.

Answer:

How much should JM record as the cost of the new machine in year 1? 135,000
3 How much should JM record as a gain (loss), if any, in year 1? (10,000)

[Pluck]

I thought this one was weird too. The trade-in allowance of $105,000 is throwing it off.

They received a trade-in allowance of $105,000 for their $90,000 fair value machine. So they sort of got a $15,000 credit on top of their $90,000 machine. Take that $15,000 out of the equation because they didn't pay it, and the exchange lacks commercial substance so they aren't recording the new machine at fair value:

$105,000 – $15,0000 = $90,000 consideration from the old machine.

It also says they paid the difference in cash. If they had a $105,000 trade in allowance but received a machine that was $150,000, they would have had to pay $45,000 in cash for the difference. So, to put it simply:

$90,000 fair value of old machine + $45,000 cash to make up the difference between the trade in credit of $105,000 and the fair value of the new machine of $150,000.

$90,000 + $45,000 = $135,000.

[Author]

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