On December 1, 2014, Kelso Company acquired new equipment in exchange for old equipment that it had acquired in 2011. The old equipment was purchased for $140,000 and had a book value of $53,200. On the date of the exchange, the old equipment had a fair value of $56,000. In addition, Kelso paid $182,000 cash for the new equipment, which had a list price of $252,000. The exchange lacked commercial substance. At what amount should Kelso record the new equipment for financial accounting purposes?

Question

Quizplus · Accepted Answer

When an exchange lacks commercial substance, the new equipment is recorded at the book value of the old equipment plus any cash paid. The book value of the old equipment is $53,200, and the cash paid is $182,000, totaling $235,200. However, since the fair value of the old equipment ($56,000) is higher than its book value, the new equipment should be recorded at the fair value of the old equipment plus cash paid, which is $238,000 ($56,000 + $182,000).

On December 1, 2014, Kelso Company Acquired New Equipment in Exchange