Question

Sheridan Inc. and Carla Vista Co. have an exchange with no commercial substance. The asset given up by Sheridan Inc. has a book value of $52000 and a fair value of $87000. The asset given up by Carla Vista Co. has a book value of $117000 and a fair value of $102000. Boot of $22000 is received by Carla Vista Co. What amount should Carla Vista Co. record for the asset received?

a. $102000
b. $87000
c. $1,17000
d. $74,000

Answer 1

Carla Vista Co. should record the asset received at its fair value of $102,000.

Step-by-step explanation:

Carla Vista Co. should record the asset received at its fair value of $102,000.

When assets are exchanged with no commercial substance, the book value of the asset given up is used to determine any gain or loss. In this case, the asset given up by Sheridan Inc. has a book value of $52,000 and a fair value of $87,000. The asset given up by Carla Vista Co. has a book value of $117,000 and a fair value of $102,000. Since the asset received by Carla Vista Co. has a fair value of $102,000, that is the amount it should record for the asset received.

Answer 2

b. $87000

Step-by-step explanation:

The book value is the value of an asset after deducting accumulated depreciation and fair value of an asset is the market-driven value of the asset which in most cases is the real value.

Accounting to IAS 16 (Property, plant and equipment) non-current assets should be recorded either the cost model or the revaluation model but since market-driven values are more relevant and reliable entities opt to record their assets at fair value . Secondly Fair Value Accounting requires entities to use market values as a basis for recording certain assets.

In this case the fair value of the asset is greater than the book value. Therefore, asset received by Carla Vista Co. is recorded at fair value (i.e at $87000).