On March 31, year 4, Winn Company traded in an old machine
having a carrying amount of $16,800, and paid a cash difference
of $6,000 for a new machine having a total cash price of
$20,500. The cash flows from the new machine are expected to
be significantly different than the cash flows from the old machine.
On March 31, year 4, what amount of loss should Winn
recognize on this exchange?

(b) The cash price of the new machine represents its fair
market value (FMV). The FMV of the old machine can be determined
by subtracting the cash portion of the purchase price
($6,000) from the total cost of the new machine: $20,500 –
$6,000 = $14,500. Since the book value of the machine
($16,800) exceeds its FMV on the date of the trade-in ($14,500),
the difference of $2,300 must be recognized as a loss.