CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsHard
A company exchanges an old machine for a new, dissimilar machine. The old machine has an original cost of $100,000 and accumulated depreciation of $70,000. Its fair value at the time of exchange is $35,000. The new machine has a fair value of $120,000. The company also pays $85,000 in cash as part of the exchange. What is the gain or loss on the exchange of the old machine?
- ALoss of $5,000
- BNo gain or loss recognized
- CGain of $5,000
- DGain of $15,000
Show answer & explanationAnswer & explanation
Correct answer: C. Gain of $5,000
The gain or loss on the exchange of nonmonetary assets is calculated by comparing the fair value of the asset given up to its book value. Since the assets are dissimilar, all gains and losses are recognized.
Why the other options are wrong
- A. Incorrect, this would imply the book value was higher than the fair value.
- B. Incorrect, gains/losses are recognized when assets are dissimilar.
- D. Incorrect, this miscalculates the gain.
Nonmonetary Asset Exchange (Dissimilar)
An exchange of nonmonetary assets where the economic substance of the transaction changes due to the assets having different uses or values for the entities involved.
- Fair value is used to measure the assets exchanged.
- All gains and losses are recognized immediately.
- The new asset is recorded at its fair value.
Memory trick: Different Machines, Different Gains.