Question

On January 2, 2020, Vaughn Manufacturing 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 $29500 Accumulated depreciation as of January 2, 2020 29500 Average published retail value 15400 New Truck List price $74900 Cash price without trade-in 64700 Cash paid with trade-in 55000 What should be the cost of the new truck for financial accounting purposes?

Answer 1

Answer: $64,700

Explanation:

First calculate the loss incurred from Exchange,

Fair value of New truck is $64,700

Loss= (Fair Value - Cash Price with trade) - (Original Value of old Asset - Accumulated Depreciation )

Loss = (64,700 - 55,000) - (29,500-29,500)

= 9,700 - 0

= $9,700

Gain of $9,700

The cost of the new truck for accounting purposes is,

New truck = (Original Value of Old Asset - Accumulated Depreciation ) + Cash Price With Trade - Loss

Seeing as there was a gain, we add that instead of subtracting loss,

New truck = (29,500-29,500) + 55,000 + 9,700

= 0+ 55,000 + 9,700

= $64,700

Cost of New truck for Financial Accounting Purposes is $64,700.

Next time just use the Cash price without trade-in. The was just to show the basis of it.