The Pizza Store trades in a delivery car for a newer model. The old delivery car has a cost of $ 9 comma 000 and accumulated depreciation of $ 7 comma 000. The Pizza Store pays cash of $ 6 comma 000. The fair value of the newer car is $ 17 comma 000. What is the gain or loss for the Pizza Store on the exchange of vehicles?

The gain on exchnage to Pizza Store is of $9000

Explanation:

The Net Book Value (NBV) of the old car is 9000 - 7000 = 2000

The cash paid for the new car is 6000.

The total cost to Pizza Store of trade is 6000 + 2000 = 8000

The asset received has a fair value of 17000.

There is a gain to Pizza store on exchange of vehicles.

The value of Gain = 17000 - 8000 = $9000

The entry for such an exchnage would be,

New Car at Cost                                     17000 Dr

Provision for depreciation - old car      7000 Dr

      Cost of old car                                              9000 Cr

      Cash                                                              6000 Cr

      Gain on exchnage/disposal                         9000 Cr

$9,000 gain

Explanation:

we must first determine the price at which the old car was traded = fair market value of the newer car - additional cash paid = $17,000 - $6,000 = $11,000

now we must determine the basis for the old car = purchase cost - accumulated depreciation = $9,000 - $7,000 = $2,000

the gain on the trade = trade value - cost basis = $11,000 - $2,000 = $9,000 gain