TIP: When plant assets are exchanged where the exchange has commercial substance and cash is given and a gain is experienced on disposal of the old asset, there are two other ways of computing the cost of the new equipment. They are as follows:
Approach and Explanation: Refer to Illustration 9-2 which summarizes the rules for recognizing gains and losses on exchanges of plant assets where the exchange has commercial substance.
Soon Yoon has experienced a gain of $4,500 on the exchange of its old asset. It is an exchange of plant assets where cash is given and the exchange has commercial substance. This is an application of the cost principle in determining the cost of the new asset.
TIP: The parties will bargain so that the total fair value given equals the total fair value received. Therefore, since Peggy Gunshanan is giving up equipment worth $15,500 but Soon Yoon's equipment is only worth $10,500, Soon Yoon is also giving $5,000 cash to Peggy Gunshanan.
Explanation: Soon Yoon has experienced a loss on the disposal of the old plant asset; the loss is ...