Question

On January 1, 2020, Sandhill Corporation sold a building that cost $273,840 and that had accumulated depreciation of $109,280 on the date of sale. Sandhill received as consideration a $263,840 non-interest-bearing note due on January 1, 2023. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2020, was 10%. At what amount should the gain from the sale of the building be reported?

Answer 1

$39,172.89

Step-by-step explanation:

Data provided in the question:

Cost of the building sold = $273,840

Depreciation = $109,280

consideration received on January 1, 2023 = $263,840

Interest rate, r = 10%

Now,

The book value on January 1, 2020 = Cos of the building - Depreciation

= $273,840 - $109,280

= $164,560

also,

Present value of consideration received =
`(Amount)/((1+r)^n)`

n = number of years from January 1, 2020 to January 1, 2023 i.e 3 years

thus,

Present value of consideration received=
`(\$263,840)/((1+0.09)^3)`

or

Present value of consideration received = $203,732.89

since,

the amount of consideration received is greater than the book value

therefore a gain will be reported

amount of gain = Present value of consideration received - Book value

= $203,732.89 - $164,560

= $39,172.89