Question

Koch traded machine 1 for machine 2 when the fair market value of both machines was $50,000. Koch originally purchased machine 1 for $75,000 and machine 1's adjusted basis was $40,000 at the time of the exchange. Machine 2's seller purchased it for $65,000 and machine 2's adjusted basis was $55,000 at the time of the exchange. What is Koch's adjusted basis in machine 2 after the exchange?

Answer 1

Answer:

machine 2                   45,000

acc depreciation mchine 1         35,000

machine 1                                    75,000

Explanation:

The seller valuation are not relevant the important is the fair value. Which is 50,000.

If there was commercial substance we will recognize a gain for 5,000

(50,000 fair value - 45,000 book value)

However, we are not given with information of commercial substance, so we should not recognize any gain or loss in trade.

The machine 2 will enter the accounting for the same value as the previous machine net book.