Acer Corp transfers factory equipment to Theta Corp in exchange for the receipt

Question

Acer Corp transfers factory equipment to Theta Corp in exchange for the receipt of $1 million cash and a 25% equity ownership stake in Theta. Acers book basis in the transferred equipment was $6 million, and the equipment was recently appraised for $6.5 million. The fair value of the investment in Theta is $5.5 million, and this fair value was reliably determined. The investment gives Acer significant influence over Theta but is not a controlling financial interest in Theta. Theta is in the business of making and selling tissues (such as Kleenex) and will use the building for tissue Production. Prior to the transferring of the equipment, Acer used the equipment to produce paper plates and napkins. However, significant overseas competition has caused profit margins and demand for the domestic producton of paper plates and napkins to fall. Production using the equipment had recently been cut down to only 1 x 8-hr shift per day. Tissues are expected to be a more profitable output, with steady consumer demand. Theta expects to run the equipment for 3 x 8-hr shifts per day. Acer hopes the investment in Theta will revive its slowing growth prospects.

Use a FASB codification and include all journal entries for this transaction.

Explanation / Answer

Assuming the journal entries in the books of accounts of Theta for the below transactions:

1) Acer corp transfers equipment to Theta corp for $100,000

Debit-Increase in Assets (Equipment)

Credit-Decrease in Assets (Cash)

2) Acer corp gets 25% equity ownership stake in Theta

3) Acer books holds the transfered equipment to the value of $6million. And the appraised equipment value is $6.5million.Since the equipment was sold to Theta at the cost of 1Million, and the value of transferred equipment is 6.5million the differntial ammount is 6.5-1=5.5million

Assuming Acer got 25%stake in Theta due to the fair value of 5.5million

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