Question

Two independent companies, Hager Co. and Shaw Co., are in the home building business. Each owns a tract of land held for development, 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: Hager's Land Shaw's Land Cost and book value $384,000 $240,000 Fair value based upon appraisal 480,000 420,000 The exchange was made, and based on the difference in appraised fair values, Shaw paid $60,000 to Hager. The exchange lacked commercial substance. For financial reporting purposes, Hager should recognize a pre-tax gain on this exchange of

Answer 1

Answer:

Hager should recognize a pre-tax gain on this exchange of $12,000

Explanation:

In order to calculate the pre-tax gain on this exchange that should be recognized, we would have to calculate first the total gain as follows:

Total Gain=$480,000-$384,000

Total Gain=$96,000

Because the exchange lacks commercial substance and some cash was received a portion of gain is recognized=$60,000/$480,000=0.125

Therefore, amount of pre-tax gain=$96,000*0.125=$12,000

Hager should recognize a pre-tax gain on this exchange of $12,000