Problem 3: Exchange of Nonmonetary Assets (No Commercial Substance)

Racer Corp. and Speedy Co. exchange equipment and the transaction lacks commercial substance. The equipment given up by Racer Corp. has a book value of $80,000 (Cost of $140,000 and accumulated depreciation of $60,000) and a fair value of $100,000. The equipment given up by Speedy Co. has a book value of $140,000 and a fair value of $90,000. Boot of $10,000 is received by Racer Corp.

Instructions:

(a) Compute Racer Corp.s gain or loss to be recognized on its income statement.

(b) Compute the basis the new equipment received by Racer Corp.

(c) Prepare the journal entry for Racer Corp. to record the exchange.