Bob's Inc. exchanged Building 24 which has a value of $6,400,000, a cost of $10,120,000, and...

Bob's Inc. exchanged Building 24 which has a value of $6,400,000, a cost of $10,120,000, and accumulated depreciation of $4,800,000 for Building B belonging to Bro Company Building B has an appraised value of $6,016,000, a cost of $12,040,000, and accumulated depreciation of $6,336,000. Bro paid Bob's $384,000 to complete the exchange.

Prepare the entries on both companies' books assuming the exchange had no commercial substance. Also prepare the journal entries on both companies’ books assuming the exchange had commercial substance.

Solutions

Expert Solution

Exchange lacks commercial substance:

Account Titles and Explanation	Debit	Credit
Bob's Inc.
Cash	384000
Building B	4936000
Accumulated depreciation	4800000
Building 24		10120000
(To record exchange of building)

Bro Company:
Building 24	6088000
Accumulated depreciation	6336000
Building B		12040000
Cash		384000
(To record exchange of building)

Note: New asset is recorded at book value of old asset + cash paid - cash received. No gain or loss on exchange since recorded at book value.

Exchange has commercial substance:

Account Titles and Explanation	Debit	Credit
Bob's Inc.
Cash	384000
Building B (6400000-384000)	6016000
Accumulated depreciation	4800000
Gain on disposal of building		1080000
Building 24		10120000
(To record exchange of building)

Bro Company:
Building 24 (6016000+384000)	6400000
Accumulated depreciation	6336000
Gain on disposal of building		312000
Building B		12040000
Cash		384000
(To record exchange of building)

Note: New asset is recorded at fair value of old asset + cash paid - cash received. Difference between fair value and book value of old asset is the gain on exchange.

ekkarill92 answered 1 year ago

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