Kennedy Company exchanged a warehouse with an appraised value of $1,260,000, a r
ID: 2588328 • Letter: K
Question
Kennedy Company exchanged a warehouse with an appraised value of $1,260,000, a recorded cost of $1,800,000, and Accumulated Depreciation of $900,000 with Stark Corporation for an office building Stark owns. The office building has an appraised value of $1,224,000, a recorded cost of $2,160,000, and Accumulated Depreciation of $1,080,000. Stark also gave Kennedy $36,000 in the exchange.
REQUIRED:
a) Prepare the entries on both companies' books assuming that the transaction is considered to have commercial substance.
b) Prepare the entries on both companies' books assuming that the transaction is considered not to have commercial substance.
Explanation / Answer
a) Prepare the entries on both companies' books assuming that the transaction is considered to have commercial substance.
Solution:
In the Books of Kennedy
Debit
Credit
Dr. Stack Corporation
$1,260,000
Dr. Accumulated Dep
$900,000
Cr. Building
$1,800,000
Cr.Gain on Sale of Building
$360,000
(On the Sale of Existing Office)
Dr. Building
$1,224,000
Dr. Bank
$36,000
Cr. Stack Corporation
$1,260,000
(On purchase of New office)
In the Books of Stack Corporation
Debit
Credit
Dr. Kennedy
$1,224,000
Dr. Accumulated Dep
$1,080,000
Cr. Building
$2,160,000
Cr. Gain on Sale of Building
$144,000
(On the Sale of Existing Office)
Dr. Building
$1,260,000
Cr. Bank
$36,000
Cr. Kennedy
$1,224,000
(On purchase of New office)
PART-2) Prepare the entries on both companies' books assuming that the transaction is considered not to have commercial substance.
Solution:
In the Books of Kennedy
Debit
Credit
Dr. Bank
$36,000
Cr. Building
$36,000
In the Books of Stack Corporation
Debit
Credit
Dr. Building
$36,000
Cr. Bank
$36,000
Debit
Credit
Dr. Stack Corporation
$1,260,000
Dr. Accumulated Dep
$900,000
Cr. Building
$1,800,000
Cr.Gain on Sale of Building
$360,000
(On the Sale of Existing Office)
Dr. Building
$1,224,000
Dr. Bank
$36,000
Cr. Stack Corporation
$1,260,000
(On purchase of New office)
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