Answer:
Scenario 1: JM Co.
a. New machine cost in Year 1 = $150,000
b. JM is to report a gain of $5,000 for Year 1.
Scenario 2: AB Inc.
a. Cost of the new machine in Year 1 = $65,500
b. There should be no gain or loss reported by AB Inc.
Scenario 3: DDC
a. Year 1 cost of the new crane is $125,000
b. A gain of $5,000 is recorded in the exchange between DDC and ZN.
Explanation:
JM Co.
1) For the used machine:
Recorded value = $100,000 ($120,000 cost minus $20,000 depreciation)
Fair value = $90,000
Gain from exchange = $5,000 ($105,000 - $100,000)
For the new machine:
List price = $150,000
Paid $105,000 with trade-in allowance
Paid an additional $45,000 in cash
Value received from DP:
Recorded value = $100,000
Cash paid = $45,000
Total exchanged value = $145,000
Fair value of the new crane = $150,000
Resulting gain from exchange = $5,000
3) JM records a gain of $5,000 which is the difference between the trade-in allowance of $105,000 and the old machine's recorded value of $100,000
Scenario 2:
AB Inc.
Used Truck:
Recorded value = $57,500 ($75,000 cost minus $17,500 depreciation)
Fair Value = $60,000
Value received from LL:
Recorded value = $57,500
Cash paid = $8,000
Fair value of new truck = $65,500
No gain or loss noted.
Scenario 3:
DDC Co.
Used crane book value = $120,000
Fair worth = $125,000
Value received from ZN:
New crane's fair value = $110,000
Cash received = $15,000
Total value received = $125,000
Book value of the old crane = $120,000
Recorded gain = $5,000
