I know the answer is C, but I don’t know why. Please correct me. When the exchan

Question

I know the answer is C, but I don’t know why.
Please correct me. When the exchange lacks commercial substance... If a FV of asset exchanged is higher then BV of asset exchanged we use the lower of two to compute cost basis of asset received. Am I wrong? So in this case we would use BV of $79800 (which is lower than FV of $84000) plus cash we gave up. But I don’t know why for This case it’s not right. Cause we use FV to compute cost of asset we received + cash=357000 107. On December 1, 2017, Kelso Company acquired new equipment in exchange for old equipment that it had acquired in 2014. The old equipment was purchased for and had a book value of $79,800. On the date of the exchange, the old equipment had a fair value of $84,000. In addition, Kelso paid $273,000 cash for the new equipment, which had a list price of $378,000. The exchange lacked commercial substance. At what amount should Kelso record the new equipment for financial accounting purposes? a. $273,000. b. $352,800. c. $357,000. d. $378,000.

Explanation / Answer

Right answer is b= 352,800

You are 100% right.

When exchange lacks commercial substance and cash is paid, then asset received is to be recorded at

Lower of (Fair value or Book Value of asset given up) + Cash paid.

In the given question

Book Value of old equipment= 79800

Fair value of old equipment = 84000

So lower is 79800 and cash paid is 273000 , so new equipment is to be recorded at 79800+273000 = 352800.

If the given answer is C , then wrong answer is given in your book. The correct answer is b. There is some mistake in your book.

Feel free to ask any clarification if required. Please provide feedback by thumbs up if satisfied. It will be highly appreciated. Thank you.

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