A company's old machine that cost $40,000 and had accumulated depreciation of $30,000 was traded in on a new machine having an estimated 20-year life with an invoice price of $50,000. The company also paid $43,000 cash, along with its old machine to acquire the new machine. If this transaction has commercial substance, the new machine should be recorded at:
A) $40,000.
B) $47,000.
C) $50,000.
D) $53,000.
E) $10,000.

Question

Quizplus · Accepted Answer

Since the transaction has commercial substance, the new machine should be recorded at fair value, which is the sum of the invoice price and the cash paid. Therefore, the new machine should be recorded at $50,000 + $43,000 = $93,000. The cost of the old machine and its accumulated depreciation should be removed from the books. Thus, the gain or loss on the exchange should be calculated by comparing the fair value of the new machine with the carrying amount of the old machine. As the carrying amount of the old machine is $10,000, there is a gain of $33,000 on the exchange.

A Company's Old Machine That Cost $40,000 and Had Accumulated