Q1. Mac and Cheese are cooking school buddies. In Year 5, upon the graduation, Mac became a business owner after purchasing a restaurant on the Niagara-on-the-Lake for

$3,000,000. The municipal tax assessment in Year 5 indicated that the property was assessed for $2,500,000, which consists of $1,500,000 for the building and $1,000,000 for the land. Please assume that there is no other cost for the acquisition of the property. At the time of the purchase it was estimated that the building would have a useful life of 40 years and no residual value. Mac depreciates his buildings using the straight-line method. Half-year convention for partial-year depreciation is in place for Mac.

In Year 5, upon the graduation, Cheese purchased a piece of land in Niagara Falls for $1,200,000, hoping to build his own restaurant in the future.

In year 18, Mac and Cheese are exchanging their properties because Mac was

looking for a piece of land to build a brand-new hotel. At the moment, the fair value of Macs property (building and land combined) is $4,500,000 and the fair value of the land owned by Cheese turns out to be $3,000,000. Thus, Cheese pays Mac $1,500,000 cash to make up the

difference in the fair values. In year 18, the municipal tax assessment indicates

that Macs property was assessed for $3,600,000, which consists of $1,800,000 for the building and $1,800,000 for the land.

Since the two properties exchanged are different in nature, please assume that the exchange has commercial substance. Both Mac and Cheese use cost model for their properties.

(1) Prepare the journal entry for Mac to record the exchange of the properties. [7 marks] (2) Prepare the journal entry for Cheese to record the exchange of the properties. [7 marks]