Answer:
Situation 1: JM Co.
a. The cost of the new machine in Year 1 = $150,000
b. JM should record a gain of $5,000 in Year 1.
Situation 2: AB Inc.
a. The cost of the new machine in Year 1 = $65,500
b. AB Inc. should not record any loss or gain.
Situation 3: DDC
a. The cost of the new crane in Year 1 is $125,000
b. There is a gain of $5,000 from the transaction between DDC and ZN.
Explanation:
JM Co.
1) Used machine:
Book value = $100,000 ($120,000 cost minus $20,000 accumulated depreciation)
Fair value of $90,000
Gain on exchange = $5,000 ($105,000 - $100,000)
New machine:
List price = $150,000
Paid $105,000 with trade-in allowance
Paid $45,000 in cash
Value received from DP:
Book value $100,000
Cash paid 45,000
Total value exchanged $145,000
Fair value of new crane = 150,000
Gain on exchange $5,000
3) JM records a gain of $5,000 being the difference between the trade-in allowance of $105,000 and the book value ($100,000) of the old machine
Situation 2:
AB Inc.
Used Truck:
Book value = $57,500 ($75,000 cost minus $17,500 accumulated depreciation)
Fair Value = $60,000
Value received from LL:
Book value $57,500
Cash paid 8,000
Fair value of new crane = 65,500
No gain or loss.
Situation 3:
DDC Co.
Book value of used crane = $120,000
Fair value of $125,000
Value received from ZN:
Fair value of new crane = $110,000
Cash received 15,000
Total value received $125,000
Book value of old 120,000
Gain $5,000
