Reba Company received $60,000 in cash and used equipment with a fair value of $140,000 from Fargo Corporation for Reba's existing equipment, which had a fair value of $200,000 and an undepreciated cost of $170,000 recorded on its books. The transaction was undertaken because Reba was revising its market strategy and planned to reduce the use of this type of equipment in its production. How much gain should Reba recognize on this exchange, and at what amount should the acquired equipment be recorded, respectively?

Question

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Under ASC 845-10-25-1, exchanges of nonmonetary assets with commercial substance are generally accounted for using the fair value of the assets exchanged. Since the equipment received has a fair value of $140,000 and the equipment given up has a fair value of $200,000, there is a gain of $60,000 ($200,000 - $140,000) that Reba should recognize.

The acquired equipment should be recorded at the fair value of $140,000. Therefore, the answer is D) $30,000 gain should Reba recognize on this exchange, and the acquired equipment should be recorded at $140,000.

Reba Company Received $60,000 in Cash and Used Equipment with a Fair