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14 June, 10:06

A fixed asset with a cost of $22,535 and accumulated depreciation of $20,282 is traded for a similar asset priced at $60,652. Assuming a trade-in allowance of $5,605, the cost basis of the new asset in a transaction with commercial substance is

a. $60,652

b. $3,352

c. $16,930

d. $5,605

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  1. 14 June, 10:43
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    a. $60,652

    Explanation:

    Gain of exchange of similar fixed assets cannot be recognized until new asset's cost is adjusted which will reflect the gain.

    Book value = Cost - Accumulated depreciation = $22,535 - $20,282 = $2,253

    Gain = Trade in Allowance - Book value = $5,605 - $2,253 = $3,352

    Cost of new asset = Price of new asset - unrealized gain = $60,652 - $3,352 = $57,300

    $60,652 basis used with commercial substance
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