On December 2, 2011, Part Company, which operates a furniture rental business, traded in a used delivery truck with a carrying amount of $5,400 for a new delivery truck having a list price of $16,000 and paid a cash difference of $7,500 to the dealer. The used truck had a fair value of $6,000 on the date of the exchange. The exchange has commercial substance. At what amount should the new truck be recorded on Part's books?
A) $10,600
B) $12,900
C) $13,500
D) $16,000

Question

Quizplus · Accepted Answer

The new truck should be recorded at its fair value, which is the list price of $16,000 minus the cash difference paid of $7,500, resulting in a fair value of $8,500. Since the exchange has commercial substance, the gain or loss on the exchange should be recognized. The gain on the exchange is calculated as follows:

Fair value of old truck: $6,000
Carrying amount of old truck: $5,400
Gain on exchange: $600

Therefore, the new truck should be recorded at its fair value of $8,500, and a gain on exchange of $600 should be recognized. The journal entry to record the exchange would be:

New delivery truck  $8,500
Accumulated depreciation - Old delivery truck   $3,000
Delivery truck (old)   $5,400
Cash   $7,500
Gain on exchange   $600

On December 2, 2011, Part Company, Which Operates a Furniture