You have two clients that are considering trading machinery with each other. Alt
ID: 2469751 • Letter: Y
Question
You have two clients that are considering trading machinery with each other. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your clients would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:
Client A
Client B
Instructions- Answer the following and explain how you derived your answer
Record the trade-in on Client A's books assuming the exchange lacks commercial substance.
Client A
Client B
Original cost $100,000 $150,000 Accumulated depreciation 40,000 80,000 Fair value 80,000 100,000 Cash received (paid) (20,000) 20,000Explanation / Answer
If the exchange lacks commercial substance. Client A maybe not recognized the 20,000 gain. (Client A doesn’t receive any cash but pay 20,000 to the client B.). The 20,000 gain will directly reduce the basis of the Machinery B from the fair market value 100,000 to 80,000. Machinery B 80,000 Accumulated Depreciation 40,000 Cash 20,000 Machinery 100,000
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