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

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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 of Acer's journal entries for this transaction.

Explanation / Answer

In the present case scenario, the transaction is a monetary transactions as in which an entity  transfers a nonfinancial asset (or assets) to another entity in exchange for a noncontrolling ownership interest in the other entity. In a monetary exchange, transaction is required to be accounted for at fair value and full or partial gain recognition is required. The relevant FASB codification is ASC-845.

As per ASC-845 general rule, "The fair value of the asset surrendered should be used to value the exchange unless the fair value of the asset received is more clearly evident of the fair value.”

As the present case involves consideration of both monetary and non monetary, the allocation between the monetary and nonmonetary portions of the transaction shall be based on their relative fair values at the time of the transaction.

If the fair value of the asset or assets given up (or of the ownership interest received if that asset’s fair value is more readily determinable) is greater than their carrying value, then either of the following should take place:

Cost Method:

As per above the under cost method the gain will be = $ 0.5 million ($ 6.5 M - $ 6 M)

Equity Method:

The partial gain shall be calculated as the amount described in cost method less the portion of that gain represented by the economic interest (which may be different from the voting interest) retained. In the given case it will be $ 375,000 ($ 6.5 M - $ 6 M) x 75%. Thus, the amount recorded for the ownership interest received is partially based on its fair value at the exchange date and partially based on the carryover amount of the asset(s) surrendered.

Journal entry in the books of Acer corp

In Millions Particulars Debit Credit Investment in Theta corp $    5.375 Cash $    1.000 Factory equipment $    6.000 Gain $    0.375

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