Question

X Company and Y Company, operating on opposite sides of the country, manufacture equipment that is virtually identical except for a higher grade of metal used by X Company. As a result, the costs and fair values of one piece of equipment to X and Y are: Cost Fair Market Value X Company $ 75,000 $ 105,000 Y Company $ 65,000 $ 91,000 X Company received an order from a customer in Y’s state and Y received an order from a customer in X’s state. In a transaction that lacks commercial substance, to avoid the cost and effort of shipping the equipment across the country, X and Y exchanged equipment and, essentially, X shipped to Y’s customer and vice versa. Due to the difference in metals, however, Y paid X $14,000 in cash.
How much profit will X Company recognize as a result of the exchange?
$0
$4,000
$14,000
$30,000

Answer 1

Answer:

$14,000

Explanation:

Company X                                               Company Y

cost per equipment $75,000                  cost per equipment $65,000

sales price $105,000                                sales price $91,000

Both companies sold one unit and they exchanged clients in order to reduce shipping cost:

company X income = $105,000 (selling price) - $75,000 (COGS) + $14,000 (money received from company Y) = $44,000

company Y's income = $91,000 (selling price) - $65,000 (COGS) - $14,000 (money given to company X) = $12,000

This exchange resulted in company X's income increasing by $14,000, while company Y's income decreased by $14,000