The “backbone” of the Internet is made up of large fibre-optic cables that link major cities, countries, and continents. Due to the importance of these links, a number of different companies have overlapping networks that connect these different locations. Global Xing and Quest Communications are two such companies.

The “backbone” of the Internet is made up of large fibre-optic cables that link major cities, countries, and continents. Due to the importance of these links, a number of different companies have overlapping networks that connect these different locations. Global Xing and Quest Communications are two such companies. The following provides information on transactions between these two companies.

Transaction 1: On January 5, 2020, Global Xing sold to Quest a part of its network connecting North and South America. In exchange, Quest sold to Global Xing cables connecting Europe and Asia. Global Xing paid $20 million as part of this transaction.

Transaction 2: On January 9, 2020, Global Xing sold to Quest some cables connecting the cities of Toronto and Montreal. These cables were laid along the shores of Lake Ontario and the St. Lawrence River. In exchange, Global Xing received from Quest cables connecting the same two cities, but running through a more inland route farther to the northwest. The rationale for the exchange was to facilitate servicing and maintenance of the cables. [Note: Fibre-optic cables require little maintenance in general.] In this transaction, Global Xing received $1 million.

The following table provides additional information on the assets exchanged in the transactions described above (in $ millions).

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* The fair values of assets given up and received are measured with equal reliability.

Required:

a. Record Transaction 1 on the books of Global Xing.

b. Record Transaction 2 on the books of Global Xing if it is considered to have commercial substance.

c. Record Transaction 2 on the books of Global Xing if it is considered to lack commercial substance.

 

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