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A truck (cost $35,000; Accumulated Depreciation $28,000) is traded in for a new truck costing $40,000. The trade-in allowance is $5,000 and the balance is paid in cash and a loan. What gain or loss arises on the exchange?
ALoss of $2,000
BGain of $2,000
CLoss of $5,000
DNo gain or loss
Answer & Solution
Correct answer: A. Loss of $2,000
1. Carrying amount of old truck $= \$35{,}000 - \$28{,}000 = \$7{,}000$.
2. Trade-in allowance received = $5,000.
3. Allowance is less than carrying amount, so there is a loss.
4. Loss $= \$7{,}000 - \$5{,}000 = \$2{,}000$, recorded as Loss on Exchange of Asset.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.7.1 "Exchanging a Fixed Asset (loss with a loan)", p.169_
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