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A machine cost $120,000, has annual depreciation of $20,000, and has accumulated depreciation of $90,000 on December 31, 2006.On April 1, 2007, when the machine has a market value of $27,500, it is exchanged for a machine with a fair value of $135,000 and the proper amount of cash is paid.The exchange lacked commercial substance.
-The new machine should be recorded at

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A machine cost $120,000, has annual depreciation of $20,000, and has accumulated depreciation of $90,000 on December 31, 2006.On April 1, 2007, when the machine has a market value of $27,500, it is exchanged for a machine with a fair value of $135,000 and the proper amount of cash is paid.The exchange lacked commercial substance.
-The new machine should be recorded at

Quizplus · Accepted Answer

The new machine should be recorded at its fair value, which is $135,000. However, since the exchange lacked commercial substance, we need to determine whether any gain or loss should be recognized. To do this, we compare the carrying amount of the old machine (i.e. the cost less accumulated depreciation) with the sum of the fair value of the new machine and any cash paid (i.e. $135,000).

Carrying amount of old machine = $120,000 - $90,000 = $30,000 
Fair value of new machine + cash paid = $135,000

Since the fair value plus cash paid is greater than the carrying amount of the old machine, a gain of $105,000 ($135,000 - $30,000) should be recognized. Therefore, the new machine should be recorded at $132,500 ($135,000 - $2,500 gain on exchange).

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