Question

International Inc. and Jodstar are exchanging productive assets. The exchange lacks commercial substance. Jodstar paid International $8,000 boot. Here is the information on the assets being exchanged:

	International – Asset I	Jodstar – Asset J
Original cost	50,000	50,000
Accumulated depreciation	19,000	25,000
Fair value	40,000	32,000
Potential gain (loss)

Record the entry for each party to record the exchange:

International entry to record acquisition of asset J:
Jodstar entry to record acquisition of Asset I:

Answer 1

Potential gain (loss) = Fair value of the asset given up - Carrying value of the asset given up

	International – Asset I	Jodstar – Asset J
Potential gain (loss)	$9,000 [$40,000-($50,000-$19,000)]	$7,000 [$32,000-($50,000-$25,000)]

International entry to record acquisition of asset J:

In case of cash received, part of realized gain is recognized.

Percentage boot = Fair value of boot / (Fair value of asset received + Fair value of boot)

= $8,000 / ($32,000 + $8,000)

= 25%

As the Percentage boot is 25% or more, all the realized gain is recognized.

Asset (new) (plug)	$32,000
Accumulated depreciation	$19,000
Cash	$8,000
Asset (old)		$50,000
Gain		$9,000

Jodstar entry to record acquisition of Asset I:

In case of cash paid, no gain is recognized.

Asset (new) (plug)	$25,000
Accumulated depreciation	$25,000
Asset (old)		$50,000