Company X has a machine with a book value of $10,000 and a fair value of $15,000. Company Y has a machine with a book value of $16,000 and a fair value of $14,000. Company X and Y exchange machines. In addition, Company X gives $1,000 to Company Y as a result of the exchange. The transaction is deemed to have commercial substance and the fair value measurement of the assets are equally reliable. Company X would record the machine acquired from Company Y at:
A) $10,000.
B) $14,000.
C) $15,000.
D) $16,000.

Question

Quizplus · Accepted Answer

When assets are exchanged in a transaction with commercial substance, the accounting treatment requires recording the assets acquired at fair value. In this case, the fair value of the machine acquired by Company X from Company Y is $15,000, which is higher than the book value of the machine given up ($10,000). Therefore, Company X would record the machine received at $15,000. The additional payment of $1,000 in cash is not relevant to the value of the asset exchange and would be recorded separately as a cash outflow.

Company X Has a Machine with a Book Value of $10,000