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Refer to the exchange concept discussed above and imagine an exchange scenario that company receives cash. By treating the exchange as having, versus lacking, commercial
Refer to the exchange concept discussed above and imagine an exchange scenario that company receives cash. By treating the exchange as having, versus lacking, commercial substance, what would be the dollar impact differences on current and future financial statements?
Exchange Lacks Commercial Substance-Cash Received When a company receives cash (sometimes referred to as "boot") in an exchange that lacks commercial substance, it may immediately recognize a portion of the gain. The general formula for gain recognition when an exchange includes some cash is as follows: Cash Received Recognized Gain x Total Gain Fair Value of Total Received Asset exchanged in is now valued at fair value ofasset given up minus cash received minus deferred gain. ustration onmonetary Asse Exchange-Exchange Lacks Commercial Substance e Elcorn Company traded a tract of land to Sanchez Development for a tract of land. The old land had a book value of $2,000,000 and a fair value of $3,000,000. To equalize the fair values of the assets exchanged, Elcorn received $600,000 cash from Sanchez. Assume the exchange lacks commercial substance. Journal Entry Debit Credit Land-new 1,600,000 Cash 600,000 Land-old 2,000,000 200,000 Gain Recognized gain $200,000 ($1,000,000x$600,000/ $3,000,000) $1,600,000 ($3,000,000-$600,000-$800,000) New land ustration onmonetary Asse Exchange-Exchange Lacks Commercial Substance The Elcorn Company traded a tract of land to Sanchez Development for a tract of land. The old land had a book value of $2,000,000 and a fair value of $3,000,000. To equalize the fair values of the assets exchanged, in addition to the land, Elcorn paid Sanchez $600,000 in cash. Assume the exchange lacks commercial substance. Journal Entry Debit Credit 2,600,000 Land-new and-old 2,000,000 Cash 600,000 New land $2,600,000 ($2,00,000 $600,000) No gain is recognized. Discussion #2 Refer to the exchange concept discussed above and imagine an exchange scenario that company receives cash. By treating the exchange as having, versus lacking, commercial substance, what would be the dollar impact differences on current and future financial statements? THINKStep by Step Solution
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