Marigold Football Co. had a player contract with Watts that is recorded in its books at $8350000 on July 1, 2020. Cullumber Football Co. had a player contract with Kurtz that is recorded in its books at $10750000 on July 1, 2020. On this date, Marigold traded Watts to Cullumber for Kurtz and paid a cash difference of $1075000. The fair value of the Kurtz contract was $12600000 on the exchange date. The exchange had no commercial substance. After the exchange, the Kurtz contract should be recorded in Marigold's books at $9425000. $11825000. $12600000. $10750000.
Marigold Football Co. had a player contract with Watts that is recorded in its books at $8350000 on July 1, 2020. Cullumber Football Co. had a player contract with Kurtz that is recorded in its books at $10750000 on July 1, 2020. On this date, Marigold traded Watts to Cullumber for Kurtz and paid a cash difference of $1075000. The fair value of the Kurtz contract was $12600000 on the exchange date. The exchange had no commercial substance. After the exchange, the Kurtz contract should be recorded in Marigold's books at
In cases where the contract exchange does not have commercial substance, the contract should be recorded at book value Thus, ordinarily no gain on the contract should be recorded. Therefore, first we have to ascertain the deferred gain
Deferred Gain = (Fair Value of Contract – Cash Diff) – Value in books before transaction
= ($12600000 - $1075000) - $8350000 = $3175000
Therefore Deferred Gain is $3175000
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