Asked by jesus salazar on Jun 27, 2024
Verified
If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, a trade-in allowance of $15,000 is granted by the seller, and the transaction is deemed to have commercial substance, the buyer would report a gain on exchange of fixed assets of $5,000.
Commercial Substance
Commercial substance is a concept in accounting that indicates a transaction significantly changes the economic situation of the parties involved.
Trade-In Allowance
The amount a seller credits to a buyer when the buyer returns a previously purchased item as part of the payment for a new item.
- Gain an understanding of the accounting practices for disposing of, exchanging, and selling fixed assets.
- Gain understanding of the implications in financial accounting for equipment exchanges, both with and without commercial substance.
- Apply the ideas of earnings, shortfalls, and the ledger value in the financial statements and discarding of permanent assets.
Verified Answer
MF
Maria FernandaJul 01, 2024
Final Answer :
True
Explanation :
In this scenario, the buyer effectively sells their old asset for $15,000, which is $5,000 more than its book value of $10,000. Since the transaction has commercial substance, this $5,000 excess is recognized as a gain on exchange of fixed assets.
Learning Objectives
- Gain an understanding of the accounting practices for disposing of, exchanging, and selling fixed assets.
- Gain understanding of the implications in financial accounting for equipment exchanges, both with and without commercial substance.
- Apply the ideas of earnings, shortfalls, and the ledger value in the financial statements and discarding of permanent assets.