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In: Accounting

The Elcorn Company traded a tract of land to Sanchez Development for a similar tract of...

The Elcorn Company traded a tract of land to Sanchez Development for a similar tract of land. The old land had a book value of $2,500,000 and a fair value of $4,500,000. To equalize the fair values of the assets exchanged, in addition to the land, Elcorn paid Sanchez $500,000 in cash. This means that the fair value of the land acquired is $5,000,000.

My teacher has informed me that there is no commercial substance in this problem. If it lacks commercial substance :

No cash received = No gain.

Gain = (Fair value given - BV given) * (cash received / total Fair value received).

Loss = BV given - Fair value given.

Can you please explain to me the journal entry from Sanchez Developments' point of view?

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ekkarill92 answered 1 year ago
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