Question

Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a cost of $110,000 and accumulated depreciation of $22,000. The new sailboat had an invoice price of $124,000. Hunter received a trade-in allowance of $96,000 on the old sailboat, which meant the company paid $28,000 in addition to the old sailboat to acquire the new sailboat.
If this transaction lacks commercial substance, what amount of gain or loss should be recorded on this exchange?


a. $8,000 loss


b. $8,000 gain


c. $88,000 loss


d. $0 gain or loss


e. $96,000 gain

Answer 1

Answer:

The amount of gain or loss should be recorded on this exchange: b. $8,000 gain

Explanation:

Book value of the old sailboat = old sailboat's cost - accumulated depreciation = $110,000-$22,000 = $88,000

Trade-in allowance of  the old sailboat - Book value of the old sailboat = $96,000 - $88,000 = $8,000 >0

Hunter Sailing Company only paid $28,000 in addition to the old sailboat to acquire the new sailboat.

Therefore, the company should record gain on this exchange of $8,000