What is the Result of the Exchange Transaction?
What are the initial costs and accumulated depreciation of the truck?
The truck costs $115,000 when new and has accumulated depreciation of $85,000.
What is the market value of the new truck?
The new truck has a market value of $91,000.
How much cash does Jackson Towing pay for the new truck?
Jackson pays cash of $50,000 for the new truck.
Does the exchange transaction have commercial substance?
Assume the exchange has commercial substance.
Answer:
The result of this exchange is a gain of $11,000.
When analyzing the exchange transaction, we can calculate the gain as follows:
The initial cost of the truck was $115,000, and the accumulated depreciation was $85,000. This means the net book value (NBV) of the old truck was $30,000 ($115,000 - $85,000).
The market value of the new truck is $91,000, and Jackson Towing paid $50,000 in cash for it. Therefore, the exchange gain is calculated as $41,000 ($91,000 - $50,000) minus the NBV of the old asset ($30,000), resulting in a total gain of $11,000.
It is important to note that the gain in this exchange transaction indicates a positive outcome for Jackson Towing, as they were able to acquire a new truck with a market value higher than the cost of the old truck and cash paid.