If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, a trade-in allowance of $15,000 is granted by the seller and the transaction is deemed to have commercial substance, the buyer would report a gain on exchange of fixed assets of $5,000. (True/False)

Question

Ean Poole

Business

27 March, 11:29

If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, a trade-in allowance of $15,000 is granted by the seller and the transaction is deemed to have commercial substance, the buyer would report a gain on exchange of fixed assets of $5,000. (True/False)

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Jovanny · Answer 1

FALSE

The statment is false, the gain is 15,000

Explanation:

When there is commercial substance the exchange of long-term assets will recognize a gain or a loss on exchange.

When there isn't the diference will be adjusted using the value of the new asset.

In this case we have commercial substance, so the buyer will report a gain on exchange for 15,000 which is the allowance made by the seller.

The value has 15,000 trade-in allowance. Which means it value is for 25,000

So the diference between the current fixed asset and the new one is 15,000

25,000 - 10,000 = 15,000

The statment is false, the gain is 15,000