McNamara
Limited purchases land from its president for $390,000 in cash. The land was
purchased by the president 15 years ago for $45,000.
(a)
Assume that McNamara follows accounting standards for private enterprises
(ASPE). Prepare the journal entry to record the purchase of the land. Use the
decision tree in Illustration 23-5 to explain the basis for your answer. What
information should be disclosed for this transaction?
(b)
How would your answer to part (a) change if McNamara were to follow IFRS?
(a)
Land................................. 390,000
Cash.............................. 390,000
This is a related party transaction. The transaction
is considered not to be in the normal course of operations of the company.
Since the land is acquired from the company president (assuming the president
is not a significant shareholder) there is a change in ownership of the land.
The transaction is therefore measured at the exchange amount.
Disclosure of the transaction would include a
description of the relationship, a description of the transaction and amount,
measurement basis and any amounts due to the company president.
However, if the president is a significant
shareholder, and especially if the president holds a controlling interest and
this is a non-cash transaction, a different conclusion may be reached as to how
the transaction should be valued as there is no beneficial change in ownership
in the assets.
(b) The major difference between ASPE/PE GAAP and IFRS is that
IFRS does not mandate remeasurement of a related party transaction.
