A firm trades in an old truck with a fair value of $26,000 and a carrying value of $21,000 for new truck that has a list price of $33,000. To complete the transaction, the firm gives the dealer $4000 cash. At what value will the firm record the new truck?

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BlackTom AI · Accepted Answer

We start by understanding what is being exchanged: a firm trades an old truck (fair value 26,000; carrying value 21,000) plus cash 4,000 for a new truck with a list price of 33,000. In a non-monetary exchange that includes cash, the asset recorded is the fair value of the consideration surrendered or the fair value of the asset received, whichever is more clearly evident. Here, the fair value of the consideration given equals the fair value of the old truck (26,000) plus cash paid (4,000), totaling 30,000. The new truck is therefore recorded at 30,000.

Now evaluating the answer choices one by one:
- Option $30,000: This matches the total consideration given (26,000 FV of old truck + 4,000 cash) and aligns with the accounting rule for exchanges involving cash, so it is the correct valuation for the new truck.
- Option $4,000: This only accounts for the cash paid, ignoring the value of the old asset contributed in the exchange and the value of the asset received, so it is incomplete and incorrect as the recorded amount.
- Option $33,000: This is the list price of the new truck, not the amount actually exchanged in this transaction. The company does not record at list price unless that is the fair value of the consideration given or received, which here is 30,000, not 33,000.
- Option $26,000: This is the fair value of the old truck, but the new truck should be recorded at the total consideration (old truck value plus cash) or the fair value of the asset received, whichever is more evident; in this case the combination yields 30,000, not 26,000.

Putting it together, the correct accounting entry would reflect the new truck at 30,000, with a corresponding credit to the old truck (carrying value 21,000), a credit to cash (4,000), and a balancing gain on disposal of 9,000 (since fair value of old truck 26,000 minus its carrying value 21,000 equals 5,000, and the total consideration 30,000 minus BV 21,000 yields 9,000 gain). The key takeaway is that the transaction value is driven by the fair value of consideration given (26,000 + 4,000 = 30,000), not by the list price or only by the cash paid.

A firm trades in an old truck with a fair value of $26,000 and a carrying value of $21,000 for new truck that has a list price of $33,000. To complete the transaction, the firm gives the dealer $4000 cash. At what value will the firm record the new truck?

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