Togo Ltd. (Togo) and Fairfax Inc.

(Fairfax) are small property development companies. Ms. Bessnerdium owns 60 percent of the shares of each company and the rest are owned by separate consortiums of investors in the cities where the companies own properties. Togo owns several small apartment buildings in Ottawa and Fairfax owns a number of apartments in Windsor. Recently, Togo and Fairfax traded buildings. Fairfax received from Togo a building that had ac ost of

$3,765,000 and accumulated depreciation of $1,950,000, and Togo received from Fairfax a building that had a cost of $4,720,000 and accumulated depreciation $1,425,000. Both buildings were appraised by independent appraisers, who estimated that the market value of each building was between $9,500,000 and $10,500,000.

Required:

a. Prepare the journal entries that Fairfax and Togo would have to make to record the exchange of the buildings.

b. What would be the effect of the exchange on each company’s financial statements in the year of the exchange? Explain.

c. What would be the effect of the exchange on each company’s financial statements in the year following the transactions? Explain.

d. Why do you think Fairfax and Togo entered into the exchange?

e. Do you think the accounting treatments you prescribed in

(a) make sense? Provide arguments to support and oppose the accounting treatment you prescribed.

f. If you were responsible for setting accounting standards, how would you require companies in the situation of Fairfax and Togo to account for these transactions?

Explain your reasoning.