2.Use the following information for questions a and b.

A machine cost $600,000, has annual depreciation of $100,000, and has accumulated depreciation of $450,000 on December 31, 2014. On April 1, 2015, when the machine has a fair value of $137,500, it is exchanged for a machine with a fair value of $675,000 and the proper amount of cash is paid. The exchange had commercial substance.

The gain to be recorded on the exchange is

a. $0.

b. $12,500

c. $25,000

d. $75,000

Answer:

- #$137,500 - ($600,000 - $475,000) = $12,500.

Why we have 475,000. Pls explain help me.