Question

Hodge Co. exchanged Building 24 which has an appraised value of $4,971,000, a cost of $7,691,000, and accumulated depreciation of $3,528,000 for Building M belonging to Fine Co. Building M has an appraised value of $4,498,000, a cost of $9,079,000, and accumulated depreciation of $4,796,000. The correct amount of cash was also paid. Assume depreciation has already been updated.

Prepare the entries on both companies' books assuming the exchange had no commercial substance.

Answer 1

Hodge Co. Books

Debit : Building M $4,163,000

Debit : Accumulated Depreciation Building 24 $3,528,000

Credit : Cost of Building 24 $7,691,000

Fine Co. Books

Debit : Building 24 $4,283,000

Debit : Accumulated Depreciation Building 24 $4,796,000

Credit : Cost of Building 24 $9,079,000

Step-by-step explanation:

Where an exchange transaction lacks commercial substance, the accounting standard IAS 16 requires that the Asset that is acquired is measured at the Carrying Amount of the Asset given up, and no gain or loss can be estimated reliably.

Carrying Amount is Cost of Asset minus Accumulated Depreciation

The Carrying Amounts for Building 24 and Building M can now be calculated as follows -

Carrying Amount :

Building 24 = $7,691,000 - $3,528,000 = $4,163,000

Building M = $9,079,000 - $4,796,000 = $4,283,000

Then, apply the Carrying Amounts as new cost of assets acquired for Both Companies as required by the standard.