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Lewis Company traded machinery with a book value of $760,000 and a fair value of $720,000. It received in exchange from Timmons Company a machine with a fair value of $800,000. Lewis also paid cash of $80,000 in the exchange. Timmons’s machine has a book value of $760,000. What amount of gain or loss should Lewis recognize on the exchange (assuming lack of commercial substance)? a. $80,000 gain b. $ -0-. c. $4,000 loss d. $40,000 loss

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Answer:

Option (d) is correct.

Explanation:

Given that,

Book value of asset given = $760,000

Fair value of machine = $800,000

Lewis also paid cash for exchange = $80,000

Fair value of asset acquired  = $800,000

Loss on exchange:

= (Book value of asset given + cash paid) - Fair value of asset acquired

= ($760,000 + $80,000) - $800,000

= $40,000 loss

Therefore, the amount of loss that Lewis recognize on the exchange is $40,000.

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