Rupert Company exchanged one business automobile for another business automobile.The old automobile had an original cost of $40, 000, an undepreciated cost of $16, 000, and a market value of $21, 000 when exchanged.In addition, Rupert paid $9, 000 cash for the replacement automobile.The list price of the replacement automobile was $35, 000.The replacement will help generate significantly greater cash flows in the business.At what amount should the replacement automobile be recorded for financial accounting purposes?

Question

Quizplus · Accepted Answer

The replacement automobile should be recorded for financial accounting purposes at the fair market value of the old automobile plus any additional cash paid. In this case, the fair market value of the old automobile is $21,000 and the additional cash paid is $9,000, for a total of $30,000. The list price of the replacement automobile is not relevant in this situation. Therefore, the replacement automobile should be recorded at $33,000 ($30,000 + $3,000 gain on the exchange).

Rupert Company Exchanged One Business Automobile for Another Business Automobile