Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a cost of $160,000 and accumulated depreciation of $100,000. The new sailboat had an invoice price of $270,000. Hunter received a trade in allowance of $70,000 on the old sailboat, which meant the company paid $200,000 in addition to the old sailboat to acquire the new sailboat. If this transaction has commercial substance, what amount of gain or loss should be recorded on this exchange?

$10,000

Explanation:

The computation of gain or loss is shown below:-

For computing the gain or loss first we need to find out the net book value of old sailboat and allowance of old sailboat which is below:-

Net book value of old sailboat = Cost of old sailboat - Accumulated depreciation

= $160,000 - $100,000

= $60,000

Allowance of old sailboat = Cost of new sailboat - Cash paid to new sailboat

= $270,000 - $200,000

= $70,000

Now,

Gain on exchange of old sailboat = Allowance of old sailboat - Net book value of old sailboat

= $70,000 - $60,000

= $10,000