In January 2011, Bevis Company exchanged an old machine, with a book value of $156,000 and a fair value of $160,000, and paid $40,000 cash for a similar used machine having a fair value of $200,000. The exchange lacked commercial substance. At what amount should the machine acquired in the exchange be recorded on Bevis's books?
A) $156,000
B) $196,000
C) $200,000
D) $204,000

Question

Quizplus · Accepted Answer

When an exchange lacks commercial substance, the new asset is recorded at the book value of the old asset plus any cash paid. Therefore, the machine should be recorded at $156,000 (book value of old machine) + $40,000 (cash paid) = $196,000.

In January 2011, Bevis Company Exchanged an Old Machine, with a Book