Question

Jane is a roofing contractor. Jane's friend needed a new roof but did not have the cash to pay. Jane's friend instead paid with a used truck that Jane could use in her roofing business. The truck had originally cost the friend $17,500 but it was gently used and only worth $6,000. Jane did not actually need the truck and ended up selling it to a used car dealer for $5,200 a few months later. What amount of gross income Jane must recognize as a result of the truck payment. Why? There noncash items received in exchange for services. vexception in the law for

Answer 1

whenever the consideration for service is not paid in cash and it is the transaction of exchange of goods as a consideration of service, the amount of goods can be determined by following 3 methods,

1) fair value method: Under this method fair value of goods received under consideration in the open market is taken as a base for recording the transaction.

2) cost plus profit method: Under this method marginal profit of 10% of cost is added to the cost of goods to determine the value to be recorded under the transaction.

3) best judgment method: Under this method, both the party mutually decide a value of goods to record the transaction.

In the given problem, Truck was originally cost to the friend $ 17,500. After used for several years, it has now value of &6,000 only. To record truck, we can not use its purchase price, because it is historical cost. it can not be used for decision making. so we have to record the truck at its fair value. the value which we will get if truck is sold in the open market.

so, truck will be recorded at fair value. i.e. $6,000.

When Truck is sold to the used car dealer, jane should record loss of $ 800. as truck is sold lower than it's book value.

for answering second question please clarify full name of law to which the question belongs.