On January 2, Elbert's Delivery Company and Wanda's Exporters exchanged similar delivery trucks in an exchange that lacks commercial substance. Data relative to the trucks follow:
Elbert's truck
Original cost $10,000
Accumulated depreciation as of January 2 8,000
Fair market value 3,000
Wanda's truck
Book value $15,000
In the exchange, Elbert paid Wanda cash of $10,000. Elbert's Delivery Company should record the new truck at:
a. $13,000
b. $8,000
c. $12,000
d. $10,000
Choice “a” is correct. The new truck is recorded at $13,000 on Elbert's books. In this case, the transaction is considered to be a monetary exchange, because the boot ($10,000) exceeds 25% of the total consideration ($10,000 plus $3,000 fair value of the old truck transferred to Wanda). Therefore, both parties to the exchange recognize all gains and losses on the transaction.
The journal entry prepared by Elbert follows:
Truck-New $ 13,000
Accum. Depre. 8,000
Cash $ 10,000
Truck-Old 10,000
Gain 1,000
I thought in a monetary exchange that lacks commercial substance, when boot is paid, no gain is recognized. Can someone help to clarify for me why there is a gain recognized?
REG (08/2011 - 73)
AUD (01/2013 - 63) (04/2013 - 72)
FAR (11/2013 - 61) (02/2014)- 71)
BEC - No attempt
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