Question

In: Accounting

On January 1, Year 1, Melvin Corporation promises to Unconditionally transfer a building that cost $100,000(appraised...

On January 1, Year 1, Melvin Corporation promises to Unconditionally transfer a building that cost $100,000(appraised recently at$ 300,000)to the Vivian Comp on Jan 1, Year 2 for a boat she bought for $250,000. As of 12/31 Year 2, Melvin still has not transferred title to the building although it received title to the boat. How should Vivian and Melvin record these transactions? Briefy restate the facts of the case. Identify the issue. State the issue in the form of a research question. Give a short answer to the issue. Cite the ASC authority for your answer. Explain the authority and apply it to the facts to discuss your reasoning to arrive at the answer.

Solutions

Expert Solution

Facts of the case:

On January 1, Year 1, Melvin Corporation promises to unconditionally transfer a building that cost $100,000 (appraised recently at$ 300,000) to the Vivian Comp on Jan 1, Year 2 for a boat she bought for $250,000.

As of 12/31 Year 2, Melvin still has not transferred title to the building although it received title to the boat.

Questions:

  1. How should Vivian and Melvin record these transactions?
  2. Briefly restate the facts of the case.
  3. Identify the issue. State the issue in the form of a research question.
  4. Give a short answer to the issue.
  5. Explain the authority and apply it to the facts to discuss your reasoning to arrive at the answer.

Answers:

A: Refer below for answer to question number (2):

Time line

Facts

At the beginning of the Year 1

Melvin Corporation promised to Vivian Comp at the beginning of Year 2 following transaction:

Melvin will transfer a building costing $100,000 (recent fair valued at $ 300,000) for a boat bought by Vivian Comp for $250,000.

At the end of Year 2

Melvin Corporation has a title to Boat however Melvin Corporation has not transferred title of Building as a consideration to Vivian Comp which was promised.

B: Refer below for answer to question number (3):

Issues to be resolved in this question are basically as follows:

  1. Recording of transactions for exchange of non-monetary assets in accordance with ASC authority,
  2. Consideration of cost and fair value of non-monetary assets for recording transactions in the financial books
  3. Recording of transactions for exchange of non-monetary assets where transfer of title of asset exchanged have not taken place

C: Refer below for answer to question numbers (1), (4) and (5)

ASC- 845 states that an exchange with another entity (reciprocal transfer) that involves principally non-monetary assets or liabilities.

In order to record transaction, following alternatives are available to determine the recorded cost of a nonmonetary asset acquired in an exchange:

Sr. No.

Alternatives

Value to be considered for non-monetary asset

1

Preferential Alternative

Fair value of the asset transferred and record a gain or loss on the exchange

2

If the fair value of asset received is more evident than the fair value of the asset transferred

Fair value of the asset received

3

If no fair values are determinable or no commercial substance in transaction

At the recorded amount of the asset transferred

Alternatives 1:

Fair Value of Asset transferred:

Building $ 300,000

Boat $ 250,000

Alternative 1

Melvin Corporation

Vivian Comp

Fair value of the asset transferred and record a gain or loss on the exchange

Boat $ 250,000

Loss on exchange $ 50,000

Recoverable from Melvin Corporation in Kind $ 300,000 (Refer Note 1 below)

Gain on exchange $ 50,000

Alternatives 2:

Fair Value of Asset received:

Building $ 300,000 (recently appraised)

Boat $ 250,000 (Bought in Cash)

Value of Boat i.e. $ 250,000 is determined as monetary transaction hence considered to be more evident.

Alternative 2

Melvin Corporation

Vivian Comp

Fair Value of Asset received

Boat $ 250,000

Loss on exchange $ 50,000

Recoverable from Melvin Corporation in Kind $ 250,000 (Refer Note 1 below)

Gain/ Loss on exchange $ NIL

Alternative 3: If no fair values are determinable or no commercial substance in transaction. This alternative is not applicable since fair values of both assets are available and transaction has commercial substance.

Note 1: As of 12/31 Year 2, since Melvin received title to the boat and Vivian Comp has not received title to the building, Melvin Corporation has stated Boat as asset in their Financial Statements on the other hand Vivian Comp stated an consideration receivable in kind from Melvin Corporation in its books since it does not have title of Building in its name.


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