Question

On January 1, 2017, Windsor Corporation sold a building that cost $271,010 and that had accumulated depreciation of $101,000 on the date of sale. Windsor received as consideration a $261,010 non-interest-bearing note due on January 1, 2020. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2017, was 9%. At what amount should the gain from the sale of the building be reported

Answer 1

Answer:

= $31,538

Explanation:

At what amount should the gain from the sale of the building be reported ?

Book value of the building at January 1, 2017 will be calculated by =

Cost of the building - Depreciation

271,010 - 101,000 = $170,010

Windsor sold the building for 261,010 due o January 1,2020, which is exactly three years after the date it was sold.

To find out the gain or loss, we will calculate the present value of the amount paid to Windsor Corporation at January 01, 2017.

Present value = $\frac{Future Valye}{(1+r)^{2}}$

Note due in 3 years,  

PV = $\frac{261,010}{(1.09)^{3} }$ = $201,548

The Present value is greater than the book value of the building at January 1,2017, so we have a gain on sale of the building, which is calculated by:

Gain on sale of building = $201,548 - $170,010

= $31,538

Windsor Corporation will report a gain on sale of building of $31,538.