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Andre45 [30]
3 years ago
10

Two independent companies, Sheridan Co. and Pharoah Co., are in the home building business. Each owns a tract of land held for d

evelopment, but each would prefer to build on the other's land. They agree to exchange their land. An appraiser was hired, and from her report and the companies' records, the following information was obtained:
Sheridan's Land Pharoah's Land
Cost and book value $581400 $356400
Fair value based upon appraisal 810000 650700

The exchange was made, and based on the difference in appraised fair values, Pharoah paid $159300 to Sheridan. The exchange lacked commercial substance. For financial reporting purposes, Sheridan should recognize a pre-tax gain on this exchange of:

a. $159300.
b. $228600.
c. $0.
d. $44958.
Business
1 answer:
marshall27 [118]3 years ago
3 0

Answer: d. $44,958.

Explanation:

Gain = Fair Value of Sheridan land - Cost and book value of Sheridan land

= 810,000 - 581,400

= $228,600

Pre-tax gain = Gain * Cash paid/ Fair value

= 228,600 * (159,300/810,000)

= $44,958

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