Respuesta :
Answer:
Denver and Bristol
1. Assuming the exchange has commercial substance, it is recorded at fair value:
Journal Entries:
a) Denver
Debit Bristol $35,500
Debit Loss on Disposal $3,500
Credit Warehouse $39,000
To record the disposal of Warehouse to Bristol at fair value.
Debit Accumulated Depreciation $56,000
Credit Warehouse $56,000
To close the accumulated depreciation account on disposal.
Debit Warehouse $35,500
Credit Bristol $35,500
To record the acquisition of Bristol warehouse at fair value.
b) Bristol:
Debit Denver $35,500
Credit Warehouse $27,000
Credit Gain on Disposal $8,500
To record the disposal of warehouse to Denver at fair value.
Debit Accumulated Depreciation $22,000
Credit Warehouse $22,000
To close the accumulated depreciation account on disposal.
Debit Warehouse $35,500
Credit Denver $35,500
To record the acquisition of Denver warehouse at fair value.
2. Assuming the exchange does not have commercial substance, it is recorded on carryover basis:
Journal Entries:
a) Denver:
Debit Bristol $39,000
Credit Warehouse $39,000
To record the disposal of Warehouse to Bristol.
Debit Accumulated Depreciation $56,000
Credit Warehouse $56,000
To close the accumulated depreciation account on disposal.
Debit Warehouse $27,000
Credit Bristol $27,000
To record the acquisition of Bristol warehouse.
b) Bristol:
Debit Denver $27,000
Credit Warehouse $27,000
To record the disposal of warehouse.
Debit Accumulated Depreciation $22,000
Credit Warehouse $22,000
To close the accumulated depreciation account on disposal.
Debit Warehouse $39,000
Credit Denver $39,000
To record the acquisition of Denver warehouse.
3. Next Level: The justification of accounting for the exchange differently is that when the transaction has commercial substance, it is accounted for at fair value. Then, there will a recognized gain or loss on disposal because this is always a difference in the net book value of an asset and its fair value. When it is not accounted for at fair value, it is accounted for on carryover basis. Carryover basis means that it recognized cost remains the same as when the giver held the asset.
Explanation:
According to FASB, "A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange."
Therefore, a business transaction is said to have commercial substance when it is expected that the future cash flows of a business will change as a result of the transaction.
Carryover basis is the value based on the value of the asset before the exchange, i.e. when it was held by the owner.
Fair value is the market value of an asset. It is the price at which the asset will be exchanged between knowledgeable third parties at at an arm's length.
