Glendenning Co. recently engaged in an exchange of buildings with XYZ Co. The fo

Question

Glendenning Co. recently engaged in an exchange of buildings with XYZ Co. The following information pertains to the building each company owned immediately before the exchange:

Glendenning Co.

XYZ Co.

Building cost

$839,470

$742,190

Accumulated depreciation

396,115

235,680

Fair value

512,750

455,322

In addition, Glendenning received $57,428 cash from XYZ.

REQUIRED: Give the entry Glendenning Co. must make to account for this exchange. Assume the exchange lacks commercial substance.

Glendenning Co.

XYZ Co.

Building cost

$839,470

$742,190

Accumulated depreciation

396,115

235,680

Fair value

512,750

455,322

Explanation / Answer

Journal entries in the books of Glendenning Co.

Building XYZ a/c Dr. $742190

Cash a/c. Dr. $. 57428

Loss on exchange Dr. $ 39852

To building a/c. $ 839470

( Being building exchanged with XYZ co. Same type of building)

The concept of commercial substance is also applied to exchanges of assets between businesses. When there is commercial substance (which is when there is a change in cash flow resulting from the transaction), the parties should recognize a gain or loss on the exchange. If there is no commercial substance, record the acquired asset at the book value of the asset given up in the exchange.

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