ExpertHard1 markMultiple Choice
CPA · Question 20 · Area II: Balance Sheet Accounts
Company A exchanges a delivery truck for a piece of land owned by Company B. The exchange lacks commercial substance. <br/><br/>Company A Truck:<br/>- Book Value: $20,000 (Cost $50k, Acc Dep $30k)<br/>- Fair Value: $25,000<br/><br/>Company A pays $2,000 cash to Company B to equalize the deal.<br/><br/>What is Company A's recorded cost of the land?
Company A exchanges a delivery truck for a piece of land owned by Company B. The exchange lacks commercial substance. <br/><br/>Company A Truck:<br/>- Book Value: $20,000 (Cost $50k, Acc Dep $30k)<br/>- Fair Value: $25,000<br/><br/>Company A pays $2,000 cash to Company B to equalize the deal.<br/><br/>What is Company A's recorded cost of the land?
Answer options:
A.
$22,000
B.
$27,000
C.
$20,000
D.
$25,000
How to approach this question
Lacks Commercial Substance: Generally, record at Book Value of asset given up + Cash Paid. Gains are deferred (unless cash received is significant). Losses are recognized immediately.
Full Answer
A.$22,000✓ Correct
A
1. **Analyze Gain/Loss:**<br/> FV ($25,000) > BV ($20,000) -> Potential Gain of $5,000.<br/>2. **Commercial Substance Rule:**<br/> Lacks substance + Cash Paid -> Defer Gain.<br/>3. **Basis of New Asset:**<br/> BV of Old ($20,000) + Cash Paid ($2,000) = $22,000.<br/> (Alternatively: FV of New ($27k) - Deferred Gain ($5k) = $22,000).
Common mistakes
Recognizing gain when commercial substance is lacking; forgetting to add cash paid to the basis.
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