A printing press priced at a fair market value of $275,000 is acquired in a transaction that has commercial substance by trading in a similar press and paying cash for the difference between the trade-in allowance and the price of the new press.
a Assuming that the trade-in allowance is $90,000, what is the amount of cash given?
b. Assuming that the book value of the press traded in is $68,000, what is the gain or loss on the exchange?
Answer:
a. Price (fair market value) of new equipment........................ $275,000
Less trade-in allowance of old equipment........................... 90,000
Cash paid on the date of exchange.................................... $185,000
b. Fair market value (trade-in allowance) of old equipment...... $ 90,000
Less book value of old equipment.................................... 68,000
Gain on exchange of equipment....................................... $ 22,000
or
Price (fair market value) of new equipment........................ $275,000
Assets given up in exchange:
Book value of old equipment....................................... $ 68,000
Cash paid on the exchange.......................................... 185,000 253,000
Gain on exchange of equipment....................................... $ 22,000