- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 26. Long-lived Assets
- Subject 6. Derecognition
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. What was the result of the exchange?
A. A credit to revenue for $600
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. A trade-in transaction is simply a sale of the old asset and the acquisition of a similar or like-kind asset. The $600 gain should not be recognized.
User Contributed Comments 7
| User | Comment |
|---|---|
| sekib | Because these are "similar" assets Needles and Powers on page 475 say gains are "not" recognized however they also point out that this is not the norm. And the answer would be carrying value plus cash paid: 1500 + (23,000 - 2,100) = 22400. |
| kuan | This is replacement analysis so Initial Cashoutflow = Cost-(Sale+Tax Credit (or-Tax Liability))+ deltaNWC. which means Gain is considered as revenue. |
| danlan | With income-tax method, B is right. |
| jcrichton | CFA Curriculum Vol. 2, pg. 487-489 explains that gains are not recognised on exchanges of similar assets; rather the cost basis of the new machine must reflect the effect of the unrecorded gain. "If the trade-in allowance received is greater than the carrying value of the asset surrendered, there has been a gain". 23000 + (2100 - 1500) = 23600. |
| wroger | should be 23000-(2100-1500) = 22400 (B) to reflect the unrecorded gain. |
| DAS11 | Check the LOS above...for similar assets, gain is NOT recognized! |
| wollogo | I agree with sekib and DAS11. |