On January 1, 2017, Flint Corporation sold a building that cost $266,270 and that had accumulated depreciation of $109,830 on the date of sale. Flint received as consideration a $256,270 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

Question

Business

Aubrey Shah

6 June, 06:12

On January 1, 2017, Flint Corporation sold a building that cost $266,270 and that had accumulated depreciation of $109,830 on the date of sale. Flint received as consideration a $256,270 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

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Answers (1)

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Megan Becker · Answer 1

The amount the gain from the sale of the building should be reported is $41,447.46.

Explanation:

As there is no established exchange price for the building, and the note had no ready market, the base to determine the gain from sales of the building should be realized based on:

+ Net book value of the building which is: Cost of the building - Accumulated depreciation = 266,270 - 109,830 = $156,440

+ Present value of the non-interest-bearing note due in 3 years with discounting rate is prevailing rate of interest for a note of this type on January 1, 2017, 9%: 256,270/1.09^3 = $197,887.46

=> Gain on sales of the building = Present value of the non-interest-bearing note - Net book value of the building = 197,887.46 - 156,440 = $41,447.46.