CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

On January 1, a business exchanged a plant asset with a book value of $1,500 for a similar asset that had a price of $23,000. The business received a trade-in allowance of $2,100 on the old plant asset. The income-tax method was used to record this trade. What was the result of the exchange?
A. A $600 recognized gain on the exchange of the plant asset
B. A cost basis of $22,400 for the new plant asset
C. A credit to cash for $21,900
Explanation: The trade-in is $600 more than the book value of the asset. Under the income tax method the gain is unrecognized, but it reduces the basis of the newly acquired asset (by the $600 gain) to $22,400.

User Contributed Comments 3

User Comment
Yuyan Is the trade-in allowance on the old plant asset the same thing as the fair value of this asset?
cbb1 Trade-in allowance equals FMV of asset or selling price of asset, but don't recognize gain, simply assign book value of old asset to new asset. Basis of new asset is cash plus book value of old asset.
danlan Without income-tax method, A is right.
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