Tanzania Inc.acquired a new delivery truck in exchange for an old delivery truck that it had acquired several years earlier for $40,000.On the date of the exchange, the old truck had a fair value of $16,000, and its net book value (carrying value)was $15,200.In addition, Tanzania paid $52,000 cash for the new truck, which had a list price of $72,000.At what amount should Tanzania record the new truck for financial accounting purposes?

Question

Quizplus · Accepted Answer

When an exchange has commercial substance (meaning it changes the future cash flows of the company), then the accounting for the exchange is based on the fair value of the assets exchanged. In this case, the old truck had a fair value of $16,000, which is less than its net book value of $15,200, meaning that it had declined in value over time. The new truck had a list price of $72,000, but Tanzania paid only $52,000 in cash, indicating that it received a discount or some other concession. Therefore, the new truck's fair value is more likely to be $68,000 ($72,000 - $4,000 discount) than $72,000. Consequently, Tanzania should record the new truck at a total cost of $68,000 ($52,000 cash + $16,000 fair value of old truck). Hence, the correct answer is C.