Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a cost of $210,000 and accumulated depreciation of $105,000. The new sailboat had an invoice price of $230,000. Hunter received a trade in allowance of $115,000 on the old sailboat, which meant the company paid $115,000 in addition to the old sailboat to acquire the new sailboat. If this transaction has commercial substance, what amount of gain or loss should be recorded on this exchange?Multiple Choice$115,000 gain$0 gain or loss$10,000 loss$105,000 loss$10,000 gain
Question
Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a cost of 105,000. The new sailboat had an invoice price of 115,000 on the old sailboat, which meant the company paid 115,000 gain10,000 loss10,000 gain
Solution
To calculate the gain or loss on the exchange, we first need to determine the book value of the old sailboat. The book value is calculated as the original cost minus the accumulated depreciation.
So, the book value of the old sailboat is 105,000 (accumulated depreciation) = $105,000.
Next, we compare the book value to the trade-in allowance. The trade-in allowance is the amount that the Hunter Sailing Company received for the old sailboat.
The trade-in allowance is $115,000.
Since the trade-in allowance (105,000), the company has a gain on the exchange.
The gain is calculated as the trade-in allowance minus the book value.
So, the gain on the exchange is 105,000 (book value) = $10,000.
Therefore, the correct answer is $10,000 gain.
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