Roland and Jodstar are exchanging productive assets. The exchange lacks commerci
ID: 2449282 • Letter: R
Question
Roland and Jodstar are exchanging productive assets. The exchange lacks commercial substance. Jodstar paid Roland $8,000 boot. Here is the information on the assets being exchanged:
Roland – Asset R
Jodstar – Asset J
Original cost
40,000
70,000
Accumulated depreciation
19,000
40,000
Fair value
40,000
32,000
Potential gain (loss)
Record the entry for each party to record the exchange:
Roland entry to record acquisition of Asset J:
Jodstar entry to record acquisition of Asset R:
Roland – Asset R
Jodstar – Asset J
Original cost
40,000
70,000
Accumulated depreciation
19,000
40,000
Fair value
40,000
32,000
Potential gain (loss)
Explanation / Answer
Exchange lacks commercial substance:
Roland entry to record acquisition of Asset J
Cash 8,000
Assets J 13,000
Accumulated Depreciation Assets R 19,000
Assets R 40,000
Gain Deferred = Fair value Assets R - Book value Assets R ; $40,000 - ($40,000 -$19,000) = $19,000
Assets J = $32,000 (fair value) - $19,000 ( gain Defered) = $13,000
Jodstar entry to record acquisition of Asset R
Assets R 38,000
Accumulated Depreciation Assets J 40,000
Assets J 70,000
Cash 8,000
Gain Deferred = Fair value Assets J - Book value Assets J ; $32,000 - ($70,000 -$40,000) = $2,000
Assets R = $40,000 (fair value) - $2,000 ( gain Defered) = $38,000
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