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Instructions Next Level independent companies, Denver and Bristol, each own a warehouse, and they agree to an xchange in which no cash changes hands. The
Instructions Next Level independent companies, Denver and Bristol, each own a warehouse, and they agree to an xchange in which no cash changes hands. The following information for the two warehouses is What is the justification of accounting for the exchange differently when the exchange has commercial substance versus when it does not? When an exchange has commercial substance, the economic position of the two companies DenverBristol $80,000 $31,500 The company's future cash flows are expected to Cost as a result of the exchange and gains and losses are Accumulated depreciation 60,000 25,000 at the time of the exchange. If the exchange does not have commercial Fair value 17.000 17.000 substance and results in a gain, GAAP requires the gain to be deferred by -the cost of the new asset GAAP imposes this requirement to prevent Required: . Assuming the exchange has commercial substance, prepare journal entries for companies from structuring transactions to exchange economically equivalent assets simply in order to book a gain in income Denver and Bristol to record the exchange 2. Assuming the exchange does not have commercial substance, prepare journal entries for Denver and Bristol to record the exchange Next Level What is the justification of accounting for the exchange differently when the exchange has commercial substance versus when it does not? 3
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