Answer:
In a non-monetary exchange that lacks commercial substance, a company should note the acquired asset using the same book value as that of the asset it exchanged.
ABC's journal entry:
Dr Cash 25,000
Dr Building - new 75,000
Dr Accumulated depreciation building - old 60,000
Cr Building - old 150,000
Cr Gain on the exchange 10,000*
As the cash received is less than 25% of the total value in the exchange, only a partial gain attributable to the cash must be acknowledged. The partial gain is derived by deducting the cash received from the asset's fair market value. Here, the fair market value was $100,000 with a carrying value of $90,000, leading to a recognized gain of $100,000 - $90,000 = $10,000. Consequently, the new carrying value needs to be adjusted to align with the fair market value minus cash received ($100,000 - $25,000 = $75,000).
XYZ's journal entry:
Dr Building - new 105,000
Dr Accumulated depreciation building - old 15,000
Cr Building - old 95,000
Cr Cash 25,000
Considering the absence of commercial substance in the transaction and that XYZ did not receive cash, it must register the new building's value by combining the old building's carrying value with the cash paid to ABC (=$80,000 + $25,000=$105,000).
