Question

A truck costs $ 50,000 when new and has accumulated depreciation of $ 35, 000. Suppose Wilson Towing exchanges the truck for a new truck. The new truck has a market value of $ 60, 000, and Wilson pays cash of $ 40,000. Assume the exchange has commercial substance. What is the result of this exchange?

A. No gain or loss
B. Gain of $ 5,000
C. Loss of $ 5,000
D. Gain of $ 45,000

Answer 1

Wilson Towing realizes a gain of $5,000 on the exchange of the old truck for the new one, because the total value given ($55,000) is less than the market value of the new truck ($60,000). The correct answer is B. Gain of $5,000.

Step-by-step explanation:

The result of the exchange for Wilson Towing when exchanging a truck costing $50,000, with accumulated depreciation of $35,000, for a new truck valued at $60,000 and paying an additional $40,000 in cash can be calculated by determining the book value of the old truck and the recognized gain or loss on the exchange.

The book value of the old truck is calculated as the cost of the truck minus the accumulated depreciation, which is $50,000 - $35,000 = $15,000. The company then pays an additional $40,000 cash, which means the total amount given up is $15,000 (book value) + $40,000 (cash) = $55,000. The new truck received has a market value of $60,000.

Since the value of what was given ($55,000) is less than the value received ($60,000), Wilson Towing recognizes a gain of $5,000 on the exchange. Therefore, the correct answer is B. Gain of $5,000.