Question

Lewis Company traded machinery with a book value of $950,000 and a fair value of $900,000. It received in exchange from Timmons Company a machine with a fair value of $1,000,000. Lewis also paid cash of $100,000 in the exchange. Timmons s machine has a book value of $950,000. What amount of gain or loss should Lewis recognize on the exchange (assuming lack of commercial substance)

Answer 1

Answer:

Lewis should recognize a gain on the exchane of $13,636

Explanation:

In order to calculate the amount of gain or loss should Lewis recognize on the exchange, first we have to determine the amount of gain with the followig formula:

Gain=Total value of the machine received-Book value of machine exchanged

     =(cash received+fair value of machine received)- $950,000

     =($100,000+$1,000,000)-$950,000

     =$ 150,000

Next, In order to calculate the amount of gain or loss should Lewis recognize on the exchange we have to use the following formula:

recognize gain or loss=(      cash received       )× gain

                    cash received+fair value of equipment received

                                   =  (    $ 100,000     )× 150,000

                                  $100,000+$1,000,000

                                   =$13,636

Lewis should recognize a gain on the exchane of $13,636