Hardin Company received $80,000 in cash and a used computer with a fair value of $240,000 from Page Corporation for Hardin Company's existing computer having a fair value of $320,000 and an undepreciated cost of $300,000 recorded on its books. The transaction has no commercial substance. How much gain should Hardin recognize on this exchange, and at what amount should the acquired computer be recorded, respectively?

Question

Quizplus · Accepted Answer

When a transaction lacks commercial substance and cash is received, the gain recognized is calculated based on the proportion of cash to the total consideration received. The total consideration is the fair value of the computer received ($240,000) plus cash ($80,000), totaling $320,000. The gain is calculated as ($80,000 cash received / $320,000 total consideration) * $20,000 total gain (fair value of old computer $320,000 - book value of old computer $300,000). This results in a recognized gain of $20,000. The new computer should be recorded at its fair value of $240,000.

Hardin Company Received $80,000 in Cash and a Used Computer