Textile
manufacturer Peterson Corp. exchanges computer software having a carrying
amount of $11,000 with the real estate company Frederick Corp. The software
that is received in exchange from Frederick Corp. has a carrying amount of
$15,100, performs different functions, and has a fair value of $20,800. Both
companies are 100% owned by the same individual and since they are closely held
companies they both follow ASPE. Discuss how this transaction should be
measured and prepare the journal entries for both companies to record the
exchange. Use the decision tree in Illustration 23-5 to explain the reasoning
for your answer.
This is a related party transaction since the same
individual owns the two companies. Since
the transaction is not in the normal course of business, there is no commercial
substance, and there is no beneficial change in ownership in the assets, the
transaction would be recorded at the carrying amounts of the assets involved.
Peterson
Corp.
Computer software (new)................... 15,100
Computer
Software (old).............. 11,000
Contributed
Surplus.................. 4,100
Frederick
Corp.
Computer software (new)................... 11,000
Retained earnings......................... 4,100
Computer
Software (old).............. 15,100
Under PE GAAP/ASPE, certain related-party
transactions must be remeasured to the carrying amount of the underlying assets
or services that were exchanged. This is the case if the transaction is not in
the normal course of business, there is no substantive change in ownership,
and/or the exchange amount is not supported by independent evidence.
Transactions that are in the normal course of business that have no commercial
substance must also be remeasured, and where the transaction is also a
non-monetary transaction, no gain or loss should be recognized. Note however,
that IFRS does not mandate remeasurement of related-party transactions.
