[Tootsie]

Can someone please explain why we are recognizing a gain? Boot is paid and it is an exchange that lacks commercial substance, so I thought we do not recognize a gain. This is from Becker F2 #12 on m.c.

On January 2, Elbert’s Delivery Company and Wanda’s Exporters exchanged similar delivery trucks in an exchange that lacks commercial substance. Data relative to the trucks follow:

Elbert’s truck

Original cost

$10,000

Accumulated depreciation as of January 2

8,000

Fair market value

3,000

Wanda’s truck

Book value

$15,000

In the exchange, Elbert paid Wanda cash of $10,000. Elbert’s Delivery Company should record the new truck at:

a.$10,000

b.$8,000

c.$12,000

d.$13,000

Explanation

Choice “d” is correct. The new truck is recorded at $13,000 on Elbert’s books. In this case, the transaction is considered to be a monetary exchange, because the boot ($10,000) exceeds 25% of the total consideration ($10,000 plus $3,000 fair value of the old truck transferred to Wanda). Therefore, both parties to the exchange recognize all gains and losses on the transaction. The journal entry prepared by Elbert follows:

Debit (Dr)

Truck-New $ 13,000

Accum. Depre. 8,000

Credit (Cr)

Cash $ 10,000

Truck-Old 10,000

Gain 1,000

FAR - 76
AUD - 88!!! DONE!!!!!!!!
BEC - 76
REG - 77

never, never, never give up

[Anonymous]

I’m with you on this one. My answer is $12,000. Boot was PAID NOT RECEIVED, so there should be no gain.
This is just wrong! All the answers online give the same (WRONG) answer and explanation.

[Anonymous]

I think the key here is that boot is more than 25% of consideration, in which case it would be recognized regardless of whether it lacks commercial substance or not…From Becker:

When the boot received is more than 25%, BOTH parties recognize gain or loss in its entirety.

[Author]

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