Question

Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The asset given up by Glen Inc. has a book value of $46,000 and a fair value of $62,000. The asset given up by Armstrong Co. has a book value of $80,000 and a fair value of $73,000. Boot of $19,000 is received by Armstrong Co.

What amount should Glen Inc. record for the asset received?
A) $62,000
B) $73,000
C) $80,000
D) $65,000

Answer 1

Glen Inc. should record the asset received at the fair value of the asset it gave up, which is $62,000. Since the exchange has no commercial substance and Glen Inc. received boot, the asset is recorded at the fair value of the asset given up rather than including boot in the calculation.

Step-by-step explanation:

When a company exchanges an asset with no commercial substance, it should record the asset received at the fair value of the asset given up, adjusted for any boot received or paid. In this case, Glen Inc. gave up an asset with a fair value of $62,000 and received boot of $19,000. Therefore, Glen Inc. should record the asset received at a value equal to the fair value of the asset it gave up because the transaction lacks commercial substance and there is no gain to be recognized on the boot received.

The correct answer is A) $62,000.

Any gain on the exchange for Glen Inc., calculated as the difference between the fair value and the book value of the asset given up ($62,000 - $46,000), would normally be recognized only to the extent of the boot paid, which is not applicable in this scenario since Glen Inc. received the boot.