Steffen-Zweig Company exchanges two used printing presses with a total net book

Question

Steffen-Zweig Company exchanges two used printing presses with a total net book value of $24,000 ($40,000 cost less accumulated depreciation of $16,000) for a new printing press with a fair value of $24,000 and $3,000 in cash. The fair value of the two used printing presses is $27,000. The transaction is deemed to lack commercial substance.

Required:
Determine the amount of gain or loss that would be recognized from this exchange of assets.

I know a gain is not able to be recognized because of the lack of commercial substance. Does that mean a loss of $3,000 is being recognized because new press would be $21,000, cash $3,000, accumulated depreciation $16,000 is used against the old printing presses $40,000 in journal entry. The problem does not ask for the journal entry but rather the gain or loss. Since there is not a gain, and the fair value is $27,000, is the loss $6,000 (27,000-21,000) or $3,000 (27,000-21,000 new press+3,000 cash)??

Explanation / Answer

In virtually all cases, fair value is the accounting basis used to record items received in an exchange. The net book value of the old asset is removed from the accounts and the new model is reported at fair value. Fair value is added; net book value is removed. A gain or loss is recognized for the difference.

Fair Value of New printing Press   =     27,000

Less:

Book value of used printing assets = 24000

Cash Paid                                          = 3000

Gain/ Loss      - NIL

Fair Value of New printing Press   =     27,000

Less:

Book value of used printing assets = 24000

Cash Paid                                          = 3000

Gain/ Loss      - NIL

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