Portland Company exchanged machinery with an appraised va a recorded cost of $2,
ID: 2596745 • Letter: P
Question
Portland Company exchanged machinery with an appraised va a recorded cost of $2,450,000 and accumulated depreciation of $1,550 Powell Corporation for machinery Powell owns. The machinery has an appraised value of $1,050,000, a recorded cost of $2,850,000, and accumulated depreciation of $1,000,000. Powell also gave Portland $200,000 in the exchange. Assume depreciation has already been updated. Note, also, that appraised values are equal to fair market values for the machinery. ,000 with owned by Powell REQUIRED: (Round all computations to the nearest dollar.) 1) Assume this exchange transaction is determined to have commercial substance a) Determine the amount of gain or loss recognized by the Powell Corporation: -gain or loss (circle one) b) Determine the amount of gain or loss recognized by the Portland Company gain or loss (circle one) 2) Assume this exchange transaction is determined to lack commercial substance. a) Determine the amount of gain or loss recognized by the Powell Corporation: gain or loss (circle one) b) Prepare the entry to recognize this exchange for the Portland CompanyExplanation / Answer
1. a. Loss of 80000 recorded by powell
1. b: gain of 350000
2.a:
in case of a loss, exchange lacking commercial substance it is recognised. Hence as above Loss= 80000
2.b:
Consideration received= fair value of assets given up= 1250000
amount of cash received= 200000
cash received as a % of total consideration= 200000/1250000 *100= 16%
since cash received is less than 25% of total consideration received only proportionate amount of gain is recognised.
gain:
Entry:
Powell books: a Fair value of asset given up 1050000 Book value: cost 2850000 Less: accumulated depreciation 1000000 b Net book value 1850000 c=a-b Gain/(loss) on exchange -800000