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 $72,000 and a fair value of $90,000. The asset given up by Armstrong Co. has a book value of $120,000 and a fair value of $114,000. Boot of $24,000 is received by Armstrong Co.

What amount should Armstrong Co. record for the asset received?
a. $90,000
b. $96,000
c. $114,000
d. $120,000

Answer 1

Armstrong Co. should record the asset received at its fair value of $114,000.

Step-by-step explanation:

Armstrong Co. should record the asset received at its fair value of $114,000. In an exchange with no commercial substance, the asset received is recorded at the fair value of the asset given up.

Since the fair value of the asset given up by Glen Inc. is $90,000, and the asset given up by Armstrong Co. has a fair value of $114,000, Armstrong Co. should record the asset received at $114,000.

In an exchange with no commercial substance, the general rule is to recognize the asset received at the fair value of the asset given up, unless the transaction lacks commercial substance, in which case any cash paid or received is recognized.