Question

Candy Co. exchanged inventory with Dandy Co. in a transaction that lacks commercial substance. Both Candy’s and Dandy’s inventory had fair values that exceeded their costs by 30%. Since Dandy’s inventory was more valuable, however, Candy paid Dandy cash to compensate for the difference. Who, if anyone, will recognize a gain on the exchange?

Answer 1

Answer:

Dandy Co.

Explanation:

Both companies traded inventories without making a profit out of it. Since Candy Co. paid some extra money to Dandy because Dandy's inventory was more valuable, only Dandy should be able to recognize a gain from this transaction, if some gain existed. Remember that the trade was supposedly done without making profit, then the money should have only compensated Dandy, not generated a gain.