Southern Company owns a building that it leases to others. The building’s fair v

Question

Southern Company owns a building that it leases to others. The building’s fair value is $2,250,000 and its book value is $1,480,000 (original cost of $2,850,000 less accumulated depreciation of $1,370,000). Southern exchanges this for a building owned by the Eastern Company. The building’s book value on Eastern’s books is $1,630,000 (original cost of $2,450,000 less accumulated depreciation of $820,000). Eastern also gives Southern $225,000 to complete the exchange. The exchange has commercial substance for both companies. Required: Prepare the journal entries to record the exchange on the books of both Southern and Eastern

Explanation / Answer

Assets are taken on fair value

Fair value of eastern building = 2250000 - 225000 = 2025000

books of both Southern

Cash debit    225000

Building - new   2025000

Accum deprec - building debit    1370000

Building - old (acct balance) credit 2850000

Gain    credit   770000

books of both eastern  

building   debit                   2250000

accumulated dep. debit     820000

credit cash                                                 225000

credit old building                                        2450000

gain in exchange                                        415000

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