Question

Bob the Builder purchased a land and building in Year 6 for $4,000,000. $1.6 million of...

Bob the Builder purchased a land and building in Year 6 for $4,000,000. $1.6 million of the purchase price was allocated to the land, and the balance to the building. At the time of the purchase it was estimated that the building would have a useful life of 40 years but no residual value.

In Year 18 Bob exchanged the land and building for a piece of undeveloped land. The fair market value of the assets given up was estimated to be $6.2 million and the fair value of the land to be received was $6.1 million. To make up the difference in the fair values of the assets exchanged, Bob also received $100,000 cash

Bob depreciates his buildings using the straight-line method. Bob adopts half-year convention for depreciation.

(1) Prepare the journal entry to record the exchange of the asset in Year 18 for Bob the Builder, assuming that the transaction has commercial substance (general case).

(2) Prepare the journal entry to record the exchange of the asset in Year 18 for Bob the Builder, assuming that the transaction lacks commercial substance (exception case).

Homework Answers

Answer #1
No. Account Titles and Explanation Debit Credit
1 Land (new) 6100000
Cash 100000
Accumulated depreciation-building 720000
Gain on exchange 2920000
Land 1600000
Building 2400000
(To record the exchange of assets having commercial substance)
2 Land (new) 3180000
Cash 100000
Accumulated depreciation-building 720000
Land 1600000
Building 2400000
(To record the exchange of assets lacking commercial substance)

Working:

Annual depreciation on building = $2400000/40 = $60000

Accumulated depreciation from Year 6 to Year 18 = ($60000 x 1/2) + ($60000 x 11) + ($60000 x 1/2) = $30000 + $660000 + $30000 = $720000

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