Question

Layne Co. has a machine that cost $850,000 on March 20, 2014. This old machine had an estimated life of ten years and a salvage value of $50,000. On December 23, 2018, the old machine is exchanged for a new machine with a fair value of $540,000. The exchange lacked commercial substance. Layne also received $60,000 cash. Assume that the last fiscal period ended on December 31, 2017, and that straight-line depreciation is used.

Show the calculation of the amount of gain or loss to be recognized by Layne Co. from the exchange. (Round answer to 0 decimal places, e.g. 1,215.)

Answer 1

No commercial substance
Cost		$        850,000
Less: Salvage Value		$          50,000
Depreciable Cost		$        800,000
Divided by: Useful life in a years		10
Depreciation Expense per year		$          80,000
Cost		$        850,000
Accumulated Depreciation on December 23, 2018 (4.75 years *80000)		$        380,000
Book value		$        470,000
Fair Value of old Assets (540000+60000)		$        600,000
Less: Book value		$        470,000
Gain on exchange		$        130,000
Under this gain only recognized in exchange which is realized in cash.
Fair value of old assets		$        600,000
Gain on exchange		$        130,000
Cash received		$          60,000
Gain recognized under No commercial substance (130000*(60000/600000))		$          13,000
Amount of gain or loss to be recognized by Layne Co. from the exchange		$          13,000