Question

On January 1, 2020, Flounder Corporation sold a building that cost $254,700 and that had accumulated depreciation of $105,950 on the date of sale. Flounder received as consideration a $244,700 non-interest-bearing note due on January 1, 2023. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2020, was 11%. At what amount should the gain from the sale of the building be reported? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The amount of gain should be reported

:

Answer 1

1)

Carrying Value of Building as on Jan 1, 2020 = Cost of Building – Accumulated Depreciation

= $254,700 - $105,950

= $148,750

There are no real exchange value available. No exchange price for the building available and the note had no ready market.

Since the notes are non-interest bearing note, there will be no interest payment during the life of notes. The Note Holder only will get Par Value $244,700 at maturity. We need to calculate the Present Value of money to be paid to notes holder at maturity at a discounting rate 11%.

Current Value as on Jan 1, 2020 of Maturity value of notes = $244,700 x PVIF (11%, 3)

= $244,700x 0.7312

= $178,924.64

The amount of gain should be reported = Current Value of Notes – Carrying Value of Building

= $178,924.64 – $148,750

= $3O,175