Question

On January 2, 2015, Quick Delivery Company traded in an old delivery truck for a newer model. The exchange lacked commercial substance. Data relative to the old and new trucks follow:
Old Truck
Original cost $24,000
Accumulated depreciation as of January 2, 2015 16,000
Fair value of used machine 6,000
New Truck
List price $36,000
Trade in allowance for used machine 6,000
Cash paid with trade in 30,000
What should be the cost of the new truck for financial accounting purposes?
a. $30,000.
b. $36,000.
c. $38,000.
d. $40,000.

Answer 1

Answer:

$36,000

Explanation:

The first step is to calculate the fair value of the new truck

(List price-cash paid with trade)-(original cost -accumulated depreciation)

= (36,000-30,000)-(24,000-16,000)

= 6000-8000

= loss of $2000

Therefore the cost of the new truck for financial accounting purposes can be calculated as follows

(Original cost- accumulated depreciation)+cash paid with trade-loss

= (24,000-16,000)+30,000-2000

= 8,000 + 30,000 - 2,000

= 38,000-2,000

= $36,000

Hence the cost of the new truck for financial accounting purposes is $36,000