[YouCanDoIt]

Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows:

Yola Co. Zaro Co.
Cost $100,000 $126,000
Market values 120,000 150,000

In Zaro’s income statement, what amount of gain should be reported from the exchange of the oil?

Answer: This is a nonmonetary transaction without commercial substance, and thus full gain is not recognized yet, but is instead deferred. Some cash is received, though, so some gain is recognized.

$30,000 cash out of a market value of the exchange of $150,000 is 20% of the transaction being in cash, so 20% of the gain is recognized now.
Zaro’s gain is $150,000 – $126,000, or $24,000, and 20% of $24,000 is $4,800, the gain recognized now.

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Although the question is not asking for a journal entry, does anyone know how to write one for this particular transaction?

FAR: 76
REG: Currently studying
AUD:
BEC:

[Fk]

@you can do it

FMV Received 120,000
Cash Received 30,000
Total 150,000
Less:
Book Value 126,000
Gain 24,000
x 20%
4,800

New Asset ( Plug ) 100,800
Cash 30,000
Old Asset 126,000
Gain 4,800

[Author]

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