Question

The Timmons Corporation, a publicly accountable entity, exchanged an office building for a strip

mall with an unrelated organization. Data on the two properties are as follows:

Office Building Strip Mall

Original Cost $1,600,000 $1,300,000

Accumulated depreciation 1,100,000 750,000

Fair value 900,000 850,000

Required –

a) Prepare the journal entry to record the exchange on the books of Timmons on the

assumption that the transaction has commercial substance.

b) Prepare the journal entry to record the exchange on the books of Timmons on the

assumption that the transaction does not have commercial substance.

c) What would the difference be if Timmons was a private company subject to ASPE?

Discuss only… do not prepare journal entries for this part.

Answer 1

Part a)

When transaction has commercial substances: We will record assets given at the fair market value of assets and difference of Book value & assets received value taken as a profit or loss. New assets reflect on fair value price.

When transaction has Commercial Substances
Accounts Title	Debit	Credit
Strip Mall	850,000
Accumulated Depreciation - office Building	1,100,000
Office Building		1,600,000
Profit on transfer of Office Building		350,000

Working:

Calculation of profit or (loss)
Office Building	1,600,000
Accumulated Depreciation	1,100,000
Net Value of Office Building	500,000
Fair Price of transfer assets received - Strip Mall	850,000
Profit / (Loss)	350,000

Part b)

When transaction not have commercial substance then we will record asset taken as a book value of asset given. There is no Profit & Loss.

When transaction not have Commercial Substances
Accounts Title	Debit	Credit
Strip Mall	500,000
Accumulated Depreciation - office Building	1,100,000
Office Building		1,600,000

Part c)

If Timmons was a private company subject to ASPE, then all tarnsfer should be recorded on fair value and diffrence if any taken to Profit and loss Account.