Use the following data for questions 10 through 17. Each question is independent of the other questions.
Sawyer Corporation has a machine (Machine A) that it acquired on 1/1/14 for $540,000. On 12/31/14 such machines have a selling price and fair value of $621,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.
Brown Corporation has a machine (Machine B) that it acquired on 1/1/14 for $729,000. On 12/31/14 such machines have a selling price and fair value of $540,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.
On 12/31/14 Brown gave Machine B plus $81,000 cash to Sawyer in return for
Machine A.
-Assume that both Sawyer and Brown are new machine dealers and that the machines are still new. Also assume that the exchange lacks commercial substance. At what amount will Machine A be recorded on Brown's books?
A) $729,000.
B) $621,000.
C) $810,000.
D) $540,000.

Question

Quizplus · Accepted Answer

Since the exchange lacks commercial substance, the new asset (Machine A) is recorded at the book value of the old asset (Machine B) given up plus any cash paid. Machine B's book value is its original cost ($729,000) because it's still considered new and hasn't been depreciated. Brown gave $81,000 cash along with Machine B for Machine A, but since the exchange lacks commercial substance, we ignore the fair value of the machines and focus on the book value of the asset given up plus cash paid. Therefore, the correct answer is the book value of Machine B, which is $729,000, not including the cash because the cash paid does not change the book value of the machine acquired in an exchange that lacks commercial substance.

Use the Following Data for Questions 10 Through 17