Question

A fixed asset with a cost of $41,000 and accumulated depreciation of $36,000 is traded for a similar asset priced at $50,000 (fair market value) in a transaction with commercial substance.
Assuming a trade-in allowance of $4,000, at what cost will the new equipment be recorded in the books?

a. $45,000 b. $51,000 c. $54,000 d. $50,000

Answer 1

Answer:

b. $51,000

Explanation:

The computation of  the cost of new equipment is shown below:

= Fair market value of the fixed asset + loss

= $50,000 + $1,000

= $51,000

where,

Loss is

= Book value - trade in allowance

The book value

= Cost of the fixed asset - accumulated depreciation

= $41,000 - $36,000

= $5,000

So, the loss would be

= $5,000 - $4,000

= $1,000 loss