On December 1, 2014, Kelso Company acquired new equipment in exchange for old eq

Question

On December 1, 2014, Kelso Company acquired new equipment in exchange for old equipment that it had acquired in 2011. The old equipment was purchased for $140,000 and had a book value of $53,200. On the date of the exchange, the old equipment had a fair value of $56,000. In addition, Kelso paid $182,000 cash for the new equipment, which had a list price of $252,000. The exchange lacked commercial substance. At what amount should Kelso record the new equipment for financial accounting purposes?

A, $252,000

B. $238,000

C. $235,200

D. $182,000

Explanation / Answer

For Accounting Purposes in case of an exchange the new product is listed at a price which equals the fair value of assets surrendered.

Therefore Book Value of new equipment = Fair Value of Old + Cash Paid

Book Value = $182,000 + $ 56,000 = $238,000

The difference in the list price of new equipment and the book value is due to superior negotiating skills of Kelso, which leads to a unreaized gain.

Similarly higher fair value of old equipment is a gain for Kelso due to maybe better management of equipment.

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