Question

Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a cost of $250,000 and accumulated depreciation of $150,000. The new sailboat had an invoice price of $263,000. Hunter received a trade in allowance of $116,000 on the old sailboat, which meant the company paid $147,000 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

Answer 1

Answer:

The gain is $17,000

Explanation:

Solution

Recall that:

Hunter sailing Company replaced an oil sailboat for a new one

The cost of the old sailboat =$250,000

The accumulated depreciation = $150,000

The invoice price of new sailboat = $263,000

Trade in allowance received = $116,000

The company old sailboat = $147,000

Now,

Market value of new sailboat = $263,000

Book value of old sailboat= ($250,000 - $150,000) = $100,000

The cash = $147,000

 100,000 + 146,000 = $246,000

The gain = $263,000- $246,000 = $17,000

As this transaction lacks commercial substance, the $17,000 gain should not be recognized.