Question

Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a cost of $210,000 and accumulated depreciation of $84,000. The new sailboat had an invoice price of $239,000. Hunter received a trade in allowance of $138,000 on the old sailboat, which meant the company paid $101,000 in addition to the old sailboat to acquire the new sailboat. If this transaction has commercial substance, what amount of gain or loss should be recorded on this exchange?

Answer 1

Answer: Gain of $12,000

Explanation:

First off, what was the Net book value of the old sailboat?

= Cost Price - Accumulated Depreciation

= 210,000 - 84,000

= $126,000

They paid $101,000 in cash and received a trade in allowance of $138,000 bringing the value to $239,000.

What they should have received as the trade in allowance was the NBV of $126,000. Since they didn't they got a gain of,

= 138,000 - 126,000

= $12,000

Because this transaction has commercial substance, the gain would be $12,000.