Question

A plant asset with a cost of $15,000 is traded for a similar asset priced at $20,000. Assuming accumulated depreciation of $12,500 and a trade-in allowance of $1,500, what is the cost basis of the new asset for financial reporting purposes?

Answer 1

Answer:

Explanation:

Gains on exchanges of similar fixed assets are not recognized; instead the cost of the new asset is adjusted to reflect the gain as follows: book value = $3,500 (Cost $42,000 ­ accumulated depreciation $38,500)

There is a $1,500 gain (trade-in allowance $5,000 ­ book value $3,500 ).

Cost of the new asset = List Price ($60,000) ­ unrecognized gain $1,500 = $58,500; or

Cash paid $55,000 ($60,000 - $5,000) + Book Value of Old Asset $3,500 = $58,500.