Bally Ho Inc. traded one of its used trailers (cost $ 15,000, accumulated depreciation $ 13,500) for another used trailer with a fair value of $ 2,400. Bally Ho also paid $ 300 to complete the transaction. Since the exchange will leave Bally Ho in the same economic position, this transaction lacks commercial substance. What is the gain or loss on the exchange?

Question

Quizplus · Accepted Answer

Since the exchange lacks commercial substance, the book value of the old asset is transferred to the new one. The book value of the old trailer is $1,500 ($15,000 cost - $13,500 accumulated depreciation). Bally Ho paid an additional $300, making the total book value of the new trailer $1,800 ($1,500 + $300), which is less than its fair value of $2,400. However, without commercial substance, gains are not recognized, resulting in no gain or loss being reported.