non monetary transactions

Question 1

What is JE for transactions that have commercial substance?

Answer 1

Equipment (new) $60,000
Cash 30,000
Accumulated depreciation 40,000
Equipment (old) $100,000
Gain 30,000

Note: Generally transactions that have commercial substance should be recorded at FV of asset surrendered or asset receveid whichever is clearly evident

Question 2

What is one exception to asset being recorded at FV?

Answer 2

Nonmonetary exchanges are generally recorded at fair value.

One of the exceptions to the exchange being recorded at fair value is an exchange transaction that lacks commercial substance. The main issue in determining commercial substance is whether the entity’s future cash flows are expected to significantly change.

Exceptions to this treatment include the following:
•Fair value is not determinable
•Exchange transaction to facilitate sales to customers
•Exchange transaction that lacks commercial substance

Under these exceptions, no gains or losses are recognized.

Since this transaction lacks commercial substance, no gain or loss is recognized and the new book value is equal to the book value prior to the exchange:

Question 3

How do you recognize gain in a transaction that lacks commercial substance?

Answer 3

The gain to be recognized by Slate is an amount determined by the ratio of cash received to fair value of the total consideration received. The “partial” gain would be computed by multiplying this ratio times the total implied gain, which is the difference between the carrying amount and the fair value of the land surrendered.

Question 4

Lacks Commercial substance?

Answer 4

• CF are not different(SIMILAR)

* New Asset=Book Value of old asset

Question 5

Has Commerical Substance

Answer 5

• CF are different

* New Asset=FV of old asset

Question 6

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 6

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.