O'Brien's Construction Plc exchanged equipment that had a book value of £40 000 for a truck that had a book value (in the other entity's books)of £38 000.The fair value of the equipment is £45 000 and the fair value of the truck is £48 000.Further cost incurred to prepare the truck for use by O'Briens was £700 for signage.What is the acquisition cost of the truck?

Question

Quizplus · Accepted Answer

The acquisition cost of the truck includes the fair value of the truck plus any additional cost incurred to prepare it for use by O'Briens. Therefore, the acquisition cost of the truck is:
Fair value of the truck (£48,000) + Cost incurred to prepare the truck (£700) = £48,700. However, remember that the initial book value of the equipment exchanged was £40,000, so the gain or loss on the exchange should also be considered. Since the fair value of the equipment exchanged is higher than its book value, a gain will be recognized. The gain is equal to the fair value of the equipment exchanged (£45,000) minus its book value (£40,000) = £5,000. Therefore, the net acquisition cost of the truck will be:
Acquisition cost of the truck (£48,700) - Gain on the exchange (£5,000) = £45,700.

O'Brien's Construction Plc Exchanged Equipment That Had a Book Value