Question
In: Accounting
On December 31, 20x5, the Patricia Corporation exchanged an office building for a shopping plaza with...
On December 31, 20x5, the Patricia Corporation exchanged an office building for a shopping plaza with another company. No cash exchange took place. Details of the transaction are as follows:
Office Building -
Original cost $1,800,000
Accumulated depreciation 1,300,000
Fair value 800,000
Fair value of shopping plaza 850,000
Patricia is a publicly accountable corporation.
Required-
a.Does this transaction have commercial substance? Explain.
b.Assuming the transaction has commercial substance, write the journal entry to
record this transaction.
c. Assuming the transaction does not have commercial substance, write the journal
entry to record this transaction.
Solutions
Expert Solution
Answer : (a.) A business transaction has commercial substance if the expected future cash flow of the business will change with the result of the transaction. In the given case, the Patricia Corporation exchanged an office building for a shopping plaza with another company, which result a change in the expected future cash flow of the business. Hence, this transaction have commercial substance.
(b.) Exchanges that have commercial substance (future cash flows are expected to change) should be accounted for at fair value of new asset. The fair value approach for exchanges having commercial substance will ordinarily result in recognition of a gain or loss because the fair value will typically differ from the recorded book value of a swapped asset.
| Date | Account title | Dr. | Cr. |
| Accumulative Depreciation a/c Dr. | $1,300,000 | ||
| shopping plaza a/c Dr. | $850,000 | ||
| To office building a/c | $1,800,000 | ||
| To Gain a/c | $350,000 | ||
| ( being office building exchanged with shopping palaza ) | |||
(c.) Exchanges that have no commercial substance (future cash flows are expected to change) should be accounted for at cost of old asset. In this case, no gain or loss shall be recorded.
| Date | Account title | Dr. | Cr. |
| Accumulative Depreciation a/c Dr. | $1,300,000 | ||
| shopping plaza a/c Dr. | $500,000 | ||
| To office building a/c | $1,800,000 | ||
| ( being office building exchanged with shopping palaza ) | |||
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