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22 February, 00:20

Lewis Company traded machinery with a book value of $760,000 and a fair value of $720,000. It received in exchange from Timmons Company a machine with a fair value of $800,000. Lewis also paid cash of $80,000 in the exchange. Timmons’s machine has a book value of $760,000. What amount of gain or loss should Lewis recognize on the exchange (assuming lack of commercial substance) ? a. $80,000 gain b. $ - 0-. c. $4,000 loss d. $40,000 loss

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  1. 22 February, 00:34
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    Option (d) is correct.

    Explanation:

    Given that,

    Book value of asset given = $760,000

    Fair value of machine = $800,000

    Lewis also paid cash for exchange = $80,000

    Fair value of asset acquired = $800,000

    Loss on exchange:

    = (Book value of asset given + cash paid) - Fair value of asset acquired

    = ($760,000 + $80,000) - $800,000

    = $40,000 loss

    Therefore, the amount of loss that Lewis recognize on the exchange is $40,000.
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