Anyone understand this one? There was a 15 minute lesson specifically stating over and over that gain/loss on exchange w commercial substance is FV of new asset – BV of old asset. Then these:
On December 31, 2005, Vey Co. traded equipment with an original cost of $100,000 and accumulated depreciation of $40,000 for productive equipment with a fair value of $60,000.
In addition, Vey received $30,000 cash in connection with this exchange. There is commercial substance to the exchange.
What should be Vey's carrying amount for the equipment received at December 31, 2005?
My Answer $30,000
$40,000
Their Answer $60,000
$80,000
You Answered Incorrectly.
This is the amount recorded if the implied gain were not recognized. However, this exchange has commercial substance. Therefore, the implied gain is recognized. When exchanges exhibit commercial substance, the asset acquired is valued at fair value.
On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker's tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld?
$0
$3,000
$10,000
My Answer $30,000
WHY IS $40,000 NOT THE ANSWER HERE? WASN'T EVEN AN OPTION.
You Answered Correctly!
The book value of the delivery truck is $60,000 ($140,000 − $80,000). Its fair value is $90,000. A gain of $30,000 is therefore implied. Cash was paid and the exchange had commercial substance. Therefore, the gain is fully recognized. If the exchange lacked commercial substance, no gain would be recognized.
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