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. 1 Question 2 How much should JM record as the cost of the new machine in Year 1?
3 How much should JM record as a gain (loss), if any, in Year 1?
Situation 2:
On December 1, Year 1, AB Inc. exchanged a used truck for a new truck from LL Co. The used truck had a book value of $57,500 ($75,000 cost minus $17,500 accumulated depreciation) and a fair value of $60,000. In addition to the exchange of the used truck, AB paid LL $8,000. The exchange has commercial substance.
1 Question
2 How much should AB record as the cost of the new truck in Year 1?
3 How much should AB record as a gain (loss), if any, in Year 1?
Situation 3:
On July 1, Year 1, DDC Co. exchanged a used crane for a new crane with ZN Corp. The used crane had a book value of $120,000 ($225,000 cost minus $105,000 accumulated depreciation) and a fair value of $125,000. The fair value of the new crane is $110,000. In addition to the exchange of the used crane, ZN paid DDC $15,000. The exchange lacks commercial substance.
1 Question
2 How much should DDC record as the cost of the new crane in Year 1?
3 How much should DDC record as a gain (loss), if any, in Year 1?

Situation 1:  JM Co.

a. The cost of the new machine in Year 1 = $150,000

b. JM should record a gain of $5,000 in Year 1.

Situation 2:  AB Inc.

a. The cost of the new machine in Year 1 = $65,500

b. AB Inc. should not record any loss or gain.

Situation 3: DDC

a. The cost of the new crane in Year 1 is $125,000

b. There is a gain of $5,000 from the transaction between DDC and ZN.

Explanation:

JM Co.

1) Used machine:

Book value = $100,000  ($120,000 cost minus $20,000 accumulated depreciation)

Fair value of $90,000

Gain on exchange = $5,000 ($105,000 - $100,000)

New machine:

List price = $150,000

Paid $105,000 with trade-in allowance

Paid $45,000 in cash

Value received from DP:

Book value                         $100,000

Cash paid                              45,000

Total value exchanged     $145,000

Fair value of new crane =   150,000

Gain on exchange               $5,000

3) JM records a gain of $5,000 being the difference between the trade-in allowance of $105,000 and the book value ($100,000) of the old machine

Situation 2:

AB Inc.

Used Truck:

Book value = $57,500 ($75,000 cost minus $17,500 accumulated depreciation)

Fair Value = $60,000

Value received from LL:

Book value                         $57,500

Cash paid                               8,000

Fair value of new crane =   65,500

No gain or loss.

Situation 3:

DDC Co.

Book value of used crane = $120,000

Fair value of $125,000

Value received from ZN:

Fair value of new crane = $110,000

Cash received                       15,000

Total value received         $125,000

Book value of old                120,000

Gain                                      $5,000

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