Q. A company decided to exchange a truck that it had purchased three years earlier for a piece of land owned by another company. The following table provides details related to both items:
Truck
Original Cost : 57 000
Estimated Life: 8 years
Salvage Value: 15 000
Depreciation: DDB at 20%
Fair Value: 27 000
Land
Original cost: 18 000
Current Fair value: 21 000
** The land is one of four identical parcels of land recently sold by the company.* The last sale of a similar truck by the company occurred more than six months ago.
The income statement for the company that disposes of the truck is most likely to report a loss of:
$2,184.
$8,184.
$9,000
I answered 1. because I compared the carrying value of the old asset with the fair value of the old asset to determine the loss as per CFAI text. I thought we only used the fair value of the acquired asset to calculate the gain/loss when the fair value of the old asset was not readily available. Isn’t that the case?
The book value of the truck is $29,184 (= $57,000 × 0.8 × 0.8 × 0.8).
The fair value of the land is $21,000.
The loss is $29,184 − $21,000 = $8,184.
By the way, a DDB depreciation rate of 20% per year corresponds to a useful life of 10 years, not 8 years. A useful life of 8 years would give a DDB depreciation rate of 25% per year.
thanks S2000magician, but shouldn’t the loss be calculated using the fair value of the old asset if that value is readily available? I got the correct book value for the truck but I compared to the truck’s fair value, not the land’s fair value. This is what is actually written in Schweser and CFAI textbooks.
You used to have an asset valued on the balance sheet at $29,184; you now have an asset valued at $21,000. To reconcile that, you have to show a loss of $8,184.
If you hadn’t done the exchange, you might have recorded a loss to drop the book value to the current FMV; with the exchange, you record both that loss and the loss of FMV on the exchange. Any way you look at it, you lose $8,184.