Acer Corp transfers factory equipment to Theta Corp in exchange for the receipt
ID: 2463893 • Letter: A
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. Issue(s)(Using the FASB codification): A. Is this a monetary or nonmonetary exchange? B. How should Acer appropriately account for this transaction? (Does this transaction have commercial substance? Using 1 of the 2 conditions.) Is this transaction within the scope of the applicable topic? In doing so, please also evaluate whether this transaction is a monetary or nonmonetary exchange, based on cash exchanged. Next, determine the appropriate accounting for this transaction, does this transaction have commercial substance? What are the journal entries for acer?
Explanation / Answer
A.
According to FASB ASC 845, an exchange of nonfinancial asset for a non-controlling ownership interest in an entity with little or no cash involved should be treated as a nonmonetary transaction. Therefore, the transfer of factory equipment by A Corp to T Corp in exchange of $1 million cash and 25% equity ownership stake in T Corp is a nonmonetary exchange.
B.
According to FASB ASC 845-10-30, exchanges of nonmonetary assets for non-controlling ownership interest in a second entity must be accounted for at fair value assuming that the transaction has commercial substance and full or partial gain should be recognized.
The fair value of the asset given up is $6.5 million that is greater than it’s carrying value $6 million. Therefore, A Corp must recognized a partial gain as it accounts for the ownership interest in T Corp using the equity method.
Acer Corp should recognize a gain of $375,000 [($6.5 million - $6 million) × 75%].
A.
According to FASB ASC 845, an exchange of nonfinancial asset for a non-controlling ownership interest in an entity with little or no cash involved should be treated as a nonmonetary transaction. Therefore, the transfer of factory equipment by A Corp to T Corp in exchange of $1 million cash and 25% equity ownership stake in T Corp is a nonmonetary exchange.
B.
According to FASB ASC 845-10-30, exchanges of nonmonetary assets for non-controlling ownership interest in a second entity must be accounted for at fair value assuming that the transaction has commercial substance and full or partial gain should be recognized.
The fair value of the asset given up is $6.5 million that is greater than it’s carrying value $6 million. Therefore, A Corp must recognized a partial gain as it accounts for the ownership interest in T Corp using the equity method.
Acer Corp should recognize a gain of $375,000 [($6.5 million - $6 million) × 75%].
A.
According to FASB ASC 845, an exchange of nonfinancial asset for a non-controlling ownership interest in an entity with little or no cash involved should be treated as a nonmonetary transaction. Therefore, the transfer of factory equipment by A Corp to T Corp in exchange of $1 million cash and 25% equity ownership stake in T Corp is a nonmonetary exchange.
B.
According to FASB ASC 845-10-30, exchanges of nonmonetary assets for non-controlling ownership interest in a second entity must be accounted for at fair value assuming that the transaction has commercial substance and full or partial gain should be recognized.
The fair value of the asset given up is $6.5 million that is greater than it’s carrying value $6 million. Therefore, A Corp must recognized a partial gain as it accounts for the ownership interest in T Corp using the equity method.
Acer Corp should recognize a gain of $375,000 [($6.5 million - $6 million) × 75%].
A.
According to FASB ASC 845, an exchange of nonfinancial asset for a non-controlling ownership interest in an entity with little or no cash involved should be treated as a nonmonetary transaction. Therefore, the transfer of factory equipment by A Corp to T Corp in exchange of $1 million cash and 25% equity ownership stake in T Corp is a nonmonetary exchange.
B.
According to FASB ASC 845-10-30, exchanges of nonmonetary assets for non-controlling ownership interest in a second entity must be accounted for at fair value assuming that the transaction has commercial substance and full or partial gain should be recognized.
The fair value of the asset given up is $6.5 million that is greater than it’s carrying value $6 million. Therefore, A Corp must recognized a partial gain as it accounts for the ownership interest in T Corp using the equity method.
Acer Corp should recognize a gain of $375,000 [($6.5 million - $6 million) × 75%].
A.
According to FASB ASC 845, an exchange of nonfinancial asset for a non-controlling ownership interest in an entity with little or no cash involved should be treated as a nonmonetary transaction. Therefore, the transfer of factory equipment by A Corp to T Corp in exchange of $1 million cash and 25% equity ownership stake in T Corp is a nonmonetary exchange.
B.
According to FASB ASC 845-10-30, exchanges of nonmonetary assets for non-controlling ownership interest in a second entity must be accounted for at fair value assuming that the transaction has commercial substance and full or partial gain should be recognized.
The fair value of the asset given up is $6.5 million that is greater than it’s carrying value $6 million. Therefore, A Corp must recognized a partial gain as it accounts for the ownership interest in T Corp using the equity method.
Acer Corp should recognize a gain of $375,000 [($6.5 million - $6 million) × 75%].
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