Question

On January 1, 2025, Bonita Corporation sold a building that cost \$254,700 and that had accumulated depreciation of $105,950 on the date of sale. Bonita received as consideration a $244,700 non-interest-bearing note due on January 1, 2028. 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 , 2025 , was 9%. At what amount should the gain from the sale of the building be reported?

Answer 1

Bonita Corporation should report a gain of $40,161.68 from the sale of the building, calculated by discounting the non-interest-bearing note received to its present value at the prevailing interest rate and subtracting the net book value of the building from it.

Step-by-step explanation:

To determine the gain from the sale of the building, we must first calculate the present value of the note received, since the note has no established market price and it's non-interest-bearing. Using the prevailing interest rate of 9%, we can discount the $244,700 note due in three years to its present value, which represents the fair market value of the building at the time of sale.

Using the present value formula: Present Value = Future Value / (1 + r)n, where 'r' is the discount rate and 'n' is the number of periods:

Present Value = $244,700 / (1 + 0.09)3 = $244,700 / 1.295029 = $188,911.68 (rounded to two decimal places).

Now, we calculate the gain on the sale of the building:

Gain = Sale Price - (Original Cost - Accumulated Depreciation)

Gain = $188,911.68 - ($254,700 - $105,950) = $188,911.68 - $148,750 = $40,161.68

Therefore, Bonita Corporation should report a gain of $40,161.68 from the sale of the building.