Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat

Question

Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a cost of $280,000 and accumulated depreciation of $140,000. The new sailboat had an invoice price of $297,000. Hunter received a trade in allowance of $141,000 on the old sailboat, which meant the company paid $156,000 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?

$0 gain or loss.

$1,000 gain.

$1,000 loss.

$140,000 loss.

$141,000 gain.

Explanation / Answer

A. $0 gain or loss.

As this transaction lacks commercial substance, the $1,000 gain should not be recognized.

Market value of new sailboat $297,000 Book value of old sailboat ($280,000 - $140,000) $140,000 Cash $156,000 ($296,000) Gain $1,000

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