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John Inc and Victor Inc.formed a joint venture on January 1,2010.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 2010.John's plant and equipment were estimated to provide an additional 5 years of utility to Jinxtor.
-Assume that the facts provided above with respect to the Jinxtor joint venture remain unchanged except that John receives $240,000 in return for investing its plant and equipment.What would be the recognizable gain arising from this transaction on December 31,2010?

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John Inc and Victor Inc.formed a joint venture on January 1,2010.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 2010.John's plant and equipment were estimated to provide an additional 5 years of utility to Jinxtor.
-Assume that the facts provided above with respect to the Jinxtor joint venture remain unchanged except that John receives $240,000 in return for investing its plant and equipment.What would be the recognizable gain arising from this transaction on December 31,2010?

Quizplus · Accepted Answer

The recognizable gain is the difference between the fair value of the asset contributed and the amount received. In this case, the fair value of the asset contributed is $800,000 and the amount received is $240,000. Therefore, the recognizable gain is $800,000 - $240,000 = $560,000. However, since John only has a 30% interest in the joint venture, the recognizable gain to John is 30% of $560,000 = $168,000. Since the gain is recognized over the estimated remaining useful life of the asset (5 years), the recognizable gain for 2010 is $168,000 / 5 = $33,600. However, the question asks for the recognizable gain on December 31, 2010, which is only 11 months into the year. Therefore, the recognizable gain for 2010 is $33,600 * 11/12 = $29,700.

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