Hoyle Company traded machinery with a book value of $475,000 and a fair value of $450,000. It received in exchange from Durler Company a machine with a fair value of $500,000. Hoyle also paid cash of $50,000 in the exchange. Durler's machine has a book value of $475,000. What amount of gain or loss should Hoyle recognize on the exchange (assuming lack of commercial substance)?

Question

Quizplus · Accepted Answer

Hoyle should recognize a loss of $25,000, calculated as the difference between the book value of the machinery given up ($475,000) and its fair value ($450,000). Since the exchange lacks commercial substance, no gain is recognized, and the loss is recognized.

Hoyle Company Traded Machinery with a Book Value of $475,000