Monier Carpet traded cleaning equipment with a cost of $17,000 and accumulated depreciation of $3,250 for new equipment with a fair market value of $11,500. Assuming the exchange lacks commercial substance, Monier should record the new equipment at
A) $14,750.
B) $13,750.
C) $11,500.
D) $7,500.

Question

Quizplus · Accepted Answer

When an exchange lacks commercial substance, the new asset is recorded at the book value of the old asset, which is the cost minus accumulated depreciation. However, if the fair market value of the new asset is lower than the book value of the old asset, the new asset is recorded at its fair market value. Here, the fair market value of the new equipment ($11,500) is lower than the book value of the old equipment ($13,750), so the new equipment is recorded at $11,500.

Monier Carpet Traded Cleaning Equipment with a Cost of $17,000