[Anonymous]

I thought that fair value was based on good given or received, whichever is more apparent, given that the word “fair value” is used for the asset received, why is the gain based on the asset given up, not the asset received in the question below? (C is right answer)

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

C.
$30,000

D.
$35,000

[Eric]

I think it’s because that is the amount he would have received if he sell the good for a monetary exchange.

[Julia]

I do not know if this is late. I had a problem with this and was looking up info on the forums. This post helped clear it up.
The basis of the new machine is the FV of the asset given up: $50,000
The book value of asset given up is : $20,000
thus the gain is $30,000. the FV of the new machine is there to trick you.
The basis of new asset is: FV of item given up + cash paid. Compare that to the BV of asset given up. Cost paid – Acc Dep

[Author]

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