Question

Brief Exercise 7-16 Account for the exchange of long-term assets (LO7-6) China Inn and Midwest Chicken exchanged assets. China Inn received a delivery truck and gave equipment. The fair value and book value of the equipment were $23,000 and $15,200 (original cost of $41,000 less accumulated depreciation of $25,800), respectively. To equalize market values of the exchanged assets, China Inn paid $7,700 in cash to Midwest Chicken. 1. At what amount did China Inn record the delivery truck? Delivery truck $ 30,700 2. How much gain or loss did China Inn recognize on the exchange? Gain on exchange $ 1,000

Answer 1

Ans:

Solution 1:

Fair value of equipment sold in exchange = $23,000

Cash paid to Midwest Chicken for delivery truck apart from equipment = $7,700

Fair value of delivery truck = Cash paid + Fair value of equipment given = $7,700 + $23,000 = $30,700

Therefore delivery truck will be recorded in books at $30,700

Solution 2:

Fair value of equipment given in exchange = $23,000

Book value of equipment = $15,200

Gain recognize on exchange = $23,000 - $15,200 = $7,800