ExpertMedium1 markMultiple Choice
CPA · Question 23 · Area II: Balance Sheet Accounts
Bolt Corp. exchanges a delivery truck for a new machine. The exchange has commercial substance.<br/>- Truck Cost: $50,000<br/>- Accumulated Depreciation: $30,000<br/>- Fair Value of Truck: $25,000<br/>- Cash Paid by Bolt: $10,000<br/><br/>What is the initial recorded cost of the new machine?
Bolt Corp. exchanges a delivery truck for a new machine. The exchange has commercial substance.<br/>- Truck Cost: $50,000<br/>- Accumulated Depreciation: $30,000<br/>- Fair Value of Truck: $25,000<br/>- Cash Paid by Bolt: $10,000<br/><br/>What is the initial recorded cost of the new machine?
Answer options:
A.
$30,000
B.
$25,000
C.
$35,000
D.
$20,000
How to approach this question
Commercial Substance = Fair Value Approach. <br/>New Asset Cost = FV of Old Asset + Cash Paid. <br/>(Also recognize Gain/Loss on Old Asset: FV $25k - BV $20k = $5k Gain).
Full Answer
C.$35,000✓ Correct
When an exchange has commercial substance, the new asset is recorded at the fair value of the asset given up plus any cash paid.<br/>FV of Truck ($25,000) + Cash Paid ($10,000) = $35,000.
Common mistakes
Using the book value of the old asset (that's for exchanges lacking commercial substance without boot).
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