Equipment that cost $387,400 and has accumulated depreciation of $312,900 is exchanged for equipment with a fair value of $160,000 and $40,000 cash is received. The exchange lacked commercial substance.

A) Calculate the gain to be recognized from the exchange.

Gain on Disposal 25,100

Explanation:

book value

cost - accumulated depreciation

387,400 - 312,900 = 74,500

trade-in:

equipment 160,000

cash 40,000

total 200,000

gain 200,000 - 74,500 = 125,500

As it lack commercial substance we recognize gain for the portion of cash received doing cross multiplication

200,00 - -> generates 125,500 gain

40,000 - -> generates X gain

40,000/200,000 x 125,500 = 25,100