Pacific National Railway (PNR), a transportation company, has substantial investments in property, plant, and equipment. In 2011, the company exchanged some of these assets with other companies.
These transactions are as follows:
Transaction 1: PNR traded railway tracks running Vancouver-Calgary-Winnipeg to its competitor, Transcanada Railway, in exchange for the Vancouver- Edmonton-Winnipeg route. PNR received $10 million from Transcanada because the southern route was shorter. Aside from this $10m differential, there are no other significant differences in the amount, risk, and timing of future benefits from these two sets of tracks. The tracks, originally laid down in the late 19th century, had a cost of $100 million, accumulated depreciation of $70 million, and fair value of S200 million. The Vancouver-Edmonton tracks were recorded on Transcanada’s books at a cost of S120 million and accumulated depreciation of $90 million.
Transaction 2: PNR is trying to expand its business in transportation beyond rail, so the company traded some railcars in return for several trucks. On PNR’s books, the railcars had a cost of $5 million, accumulated depreciation of $3 million, and fair value of $4 million. The trucks had fair value of $3.8 million and were recorded on the seller’s books at a cost of $4.5 million and accumulated depreciation of $1 million. No cash was involved in this exchange.
Transaction 3: PNR transported some luxury’ automobiles from the port in Vancouver to Winnipeg “for free.” The company does not usually transport cars on this route, so a fair value was not determinable. However, there were negligible incremental costs because doing this involved simply’ attaching a few extra railcars to an existing train bound for Winnipeg. For doing this, PNR received two luxury cars, which the company awarded to executives as perquisites (perks). These cars had a retail value totalling $300,000.
Required:
Record the journal entries for the above transactions on PNR’s books. State your reason(s) for the chosen accounting method.