[Anonymous]

Hi all,

I have a difficulty in understanding why the gain is 30,000 instead of 35,000? why are we using the fair value of the land instead of the machinery?

A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange?

A.

$0

B.

$5,000

Correct C.

$30,000

D.

$35,000

[Anonymous]

In this case, we don't care what the fair value of the new machine is. To us, the implied value, of the machine is 50,000 (the fair value of the land we're willing to give up for it).

Our “cost” is 50,000.

The book value of the machine will be 50,000.

I tried to explain it in a couple different ways. I hope that this helps.

P.S. Make sure you understand Non-Monetary exchanges fully. With and, in particular, without commercial substance. My advice is that it really helps to do journal entries for any non-monetary exchange question you come across. It's much easier to see it that way.

[Author]

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