Asset Exchange (Issues Memo)

Facts: Paper Paper, Inc. transferred equipment to Achoo, Inc. in exchange for the receipt of $1.5 million cash and a 20% equity ownership stake in Achoo. Papers book basis in the transferred equipment was $7 million, and the equipment was recently appraised for $7.5 million. The fair value of the investment in Achoo is $6 million, and this fair value was reliably determined. The investment gives Paper significant influence over Achoo but is not a controlling financial interest in Achoo. Achoo is in the business of making and selling tissues (such as Kleenex) and will use the equipment for tissue production.

Prior to transferring the equipment, Paper used the equipment to produce paper plates and napkins. However, significant overseas competition has caused profit margins and demand for the domestic production of paper plates and napkins to fall. Production using the equipment had recently been cut down to only 1 x 8-hr shift per day. Tissues are expected to be a more profitable output, with steady consumer demand. Achoo expects to run the equipment for 3 x 8-hr shifts per day. Paper hopes the investment in Achoo will revive its slowing growth prospects.

Required: Prepare an accounting issues memo to answer the question: How should Paper account for the transaction? Support your response with guidance from the Codification.