Question

In an exchange of plant assets, Transit Co. received equipment with a fair value equal to the carrying amount of equipment given up. Transit also contributed cash.
The exchange lacks commercial substance.
As a result of the exchange, Transit recognized
A. A loss equal to the cash given up.
B. A loss determined by the proportion of cash paid to the total transaction value.
C. A gain determined by the proportion of cash paid to the total transaction value.
D. Neither gain nor loss.

Answer 1

Answer:

A. A loss equal to the cash given up.

Explanation:

Fair value is the book value of an asset that is depreciated over the useful life of the asset.

Since in the exchange of plant asset Transit Co. received equipment with a fair value equal to the carrying amount of equipment given up. At this point there is no gain or loss.

When Transit Co. paid extra money after the exchange they incurred a loss equal to the cash given up.