An airplane priced at a fair value of $750,000 is acquired in a transaction that has commercial substance by trading in a similar airplane and paying cash for the difference between the trade-in allowance and the price of the new airplane. Required: Assuming that the trade-in allowance is $225,000, what is the amount of cash given?Assuming that the book value of the airplane traded-in is $175,000, what is the gain or loss on the exchange?

Answered: Assuming that the trade-in allowance is…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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An airplane priced at a fair value of $750,000 is acquired in a transaction that has commercial substance by trading in a similar airplane and paying cash for the difference between the trade-in allowance and the price of the new airplane.

Required:

Assuming that the trade-in allowance is $225,000, what is the amount of cash given?
Assuming that the book value of the airplane traded-in is $175,000, what is the gain or loss on the exchange?

Expert Solution

Step 1-Definition

Net purchase price= Fair value -Trade in allowance

Gain or loss on exchange= Trade in allowance- book value of the asset

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