Question

Timmons Company traded machinery with a book value of $360,000 and a fair value of $600,000. It received in exchange from Lewis Company a machine with a fair value of $540,000 and cash of $60,000. Lewis's machine has a book value of $570,000. What amount of gain should Timmons recognize on the exchange (assuming lack of commercial substance)?

Answer 1

Answer:

amount of gain recognize is $24000

Explanation:

Given data

Timmons book value = $360,000

Timmons fair value = $600,000

Lewis fair value = $540,000

Lewis  book value = $570,000

cash = $60,000

to find out

amount of gain recognize

solution

we know that here that cash is receive in exchange

so no commercial substance but gain is recognize

so we find gain that is

gain = fair value - book value

gain = 600000 -  360000

so gain is $240000

and

we say cash % for fair value is

cash % for fair value = cash / fair value

cash % = 60000 / 600000

cash% is 10%  for fair value  

so that here recognized gain recognize is given as

gain recognize  = gain × cash %

gain recognize  = 240000 × 10%

gain recognize  = 24000

so amount of gain recognize is $24000