John Inc and Victor Inc. formed a joint venture on January 1, 2020. John invested plant and equipment with a book value of $500,000 and a fair value of $800,000 for a 30% interest in the venture which was to be called Jinxtor Ltd. Victor contributed assets with a fair value of $2,000,000 (including $200,000 in cash) for its 70% stake in Jinxtor.
Jinxtor reported a net income of $3,000,000 for 2020. John's plant and equipment were estimated to provide an additional 5 years of utility to Jinxtor. The transactions set out above were considered to have commercial substance.
What would be the recognizable gain on January 1, 2020 arising from John's investment in Jinxtor?

Question

Quizplus · Accepted Answer

John's recognized gain on January 1, 2020 would be equal to the difference between the fair value of the plant and equipment ($800,000) and its book value ($500,000), which is a gain of $300,000. This gain is recognized because the transaction has commercial substance, as stated in the question.