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On January 1, 2017, Blue Corporation sold a building that cost $254,700 and that had accumulated...

On January 1, 2017, Blue Corporation sold a building that cost $254,700 and that had accumulated depreciation of $105,950 on the date of sale. Blue received as consideration a $244,700 non-interest-bearing note due on January 1, 2020. 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, 2017, was 9%. At what amount should the gain from the sale of the building be reported?

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Answer #1

Cost of building = $254,700

Accumulated depreciation = $105,950

Book value of building = Cost of building - Accumulated depreciation

= $254,700 - $105,950

= $148,750

Par value of non-interest-bearing note due on January 1, 2020 = $244,700

Interest rate = 9%

Time period (n) = 3 years

Present value of note = Par value of non-interest-bearing note/(1 + i)n

= 244,700/(1 + 0.09)3

= 244,700/1.295029

= $188,953

Gain from the sale of the building = Present value of note - Book value of building

= $188,953 - $148,750

= $40,203

Please ask if you have any query related to the question. Thank you

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