Use the following information for questions 108 and 109.
A machine cost $600,000, has annual depreciation of $100,000, and has accumulated depreciation of $450,000 on December 31, 2014. On April 1, 2015, when the machine has a fair value of $137,500, it is exchanged for a machine with a fair value of $675,000 and the proper amount of cash is paid. The exchange had commercial substance.
-The gain to be recorded on the exchange is

Question

Quizplus · Accepted Answer

The gain is calculated by comparing the book value of the old machine to its fair value at the time of the exchange. The book value is the cost minus accumulated depreciation ($600,000 - $450,000 = $150,000). The fair value of the old machine is $137,500. Since the exchange has commercial substance, the gain is recognized only to the extent that cash is paid. The cash paid is the difference between the fair value of the new machine and the old machine ($675,000 - $137,500 = $537,500). However, the gain to be recognized is calculated based on the decrease in the fair value of the old machine compared to its book value, which is $150,000 - $137,500 = $12,500.

Use the Following Information for Questions 108 and 109