Question

Two independent companies, ABC Co. and XYZ Co., exchange buildings. The transaction lacks commercial substance. An appraiser was hired, and from his report and the companies' records, the following information was obtained: ABC's Building $120,000 40,000 100,000 XYZ's Building $90,000 40,000 85,000 Cost Accumulated Depreciation Fair value based upon appraisal The exchange was made, and based on the difference in appraised value, XYZ Co. paid $15,000 to АВС Со. For financial reporting purposes, XYZ Co. Should recognize a pre-tax gain on this exchange of: Select one: a. $0 b. $3,000 c. $15,000 d. $20,000 e. $35,000

Answer 1

Realized gain = Fair value of the asset given up - Carrying value of the asset given up

= $85,000 - ($90,000 - $40,000)

= $35,000

As XYZ Co. paid the amount to ABC Co., no realized gain is recognized in the case of boot paid.

Recognized gain = $0

The answer is a.