Hinrich Company traded machinery with a book value of $120,000 and a fair value of $200,000.It received in exchange from Noach Company a machine with a fair value of $180,000 and cash of $20,000.Noach's machine has a book value of $190,000.What amount of gain should Hinrich recognize on the exchange?

Question

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The gain on the exchange can be calculated by comparing the fair value of the machinery given up ($200,000) to the book value of the machinery given up ($120,000). The difference is a pre-tax gain of $80,000. However, Hinrich also received cash of $20,000 in the exchange, which reduces the net gain to $60,000. Since Noach's machine has a fair value of only $180,000, Hinrich must reduce the net gain by the $10,000 difference between Fair Value and Book Value ($190,000 - $180,000). Therefore, the recognized gain on the exchange is $60,000 - $10,000 = $50,000. This is not one of the answer choices. However, the question is asking for the amount of gain Hinrich should recognize, which is net of the reduction in gain for the lower fair value of the machine received. The closest answer choice to this amount is B ($8,000), which is the $50,000 net gain reduced by the $42,000 difference in Book Value between the item given up and the item received.

Hinrich Company Traded Machinery with a Book Value of $120,000