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Flashcards in Asset Retirement & Envior. & Financial Instrument Disc. Deck (19):
1

On June 30, 2005, Finn, Inc. exchanged 2,000 shares of Edlow Corp. $30 par value common stock for a patent owned by Bisk Co. The Edlow stock was acquired in 2003 at a cost of $50,000.
At the exchange date, Edlow common stock had a fair value of $40 per share, and the patent had a net carrying amount of $100,000 on Bisk's books.
Finn should record the patent at

A. $50,000.
B. $60,000.
C. $80,000.
D. $100,000.


C. $80,000.

The patent is valued at the market value of the stock exchanged, which is $80,000 ($40 x 2,000 shares).
In general, the recorded value of purchased intangibles is the value of the consideration given or the value of the intangible, whichever is more reliable. The book value of the seller is not a reliable substitute for market value. There is no reliable amount given for the market value of the patent.

2

On December 31, 2005, Vey Co. traded equipment with an original cost of $100,000 and accumulated depreciation of $40,000 for productive equipment with a fair value of $60,000.
In addition, Vey received $30,000 cash in connection with this exchange. There is commercial substance to the exchange.
What should be Vey's carrying amount for the equipment received at December 31, 2005?

A. $30,000
B. $40,000
C. $60,000
D. $80,000

C. $60,000

When there is commercial substance to the exchange, the acquired asset is measured at fair value.

In this case, the value is $60,000 as given in the problem.

This amount also equals the fair value of assets given up in the exchange.

The implied fair value of the asset exchanged is $60,000 + $30,000 cash received, or $90,000.

The fair value of assets given up is therefore $90,000 less $30,000 cash received, or $60,000.

The full journal entry for the exchange is:

dr. plant asset 60,000;
dr. accumulated depreciation, 40,000;
debit cash 30,000;
credit plant asset 100,000;
credit gain, 30,000.

The gain equals the difference between the fair value of the asset exchanged (90,000) and its book value (60,000).

3

Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?

A.
It defers any gains and losses.

B.
It defers losses to the extent of any gains.

C.
It recognizes gains and losses immediately.

D.
It defers gains and recognizes losses immediately.


C.
It recognizes gains and losses immediately.



Gains and losses from nonmonetary exchanges that have commercial substance are recognized immediately.

4

On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker's tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld?

A.
$0

B.
$3,000

C.
$10,000

D.
$30,000

B.
$3,000

The book value of the delivery truck is $60,000 ($140,000 - $80,000). Its fair value is $90,000. A gain of $30,000 is therefore implied. Cash was paid and the exchange had commercial substance. Therefore, the gain is fully recognized. If the exchange lacked commercial substance, no gain would be recognized.

5

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values.
The exchange has commercial substance.
As a consequence of the exchange, Sable recognizes

A. A gain equal to the difference between the fair value and carrying amount of the truck given up.
B. A gain determined by the proportion of cash received to the total consideration.
C. A loss determined by the proportion of cash received to the total consideration.
D. Neither a gain nor a loss.


A. A gain equal to the difference between the fair value and carrying amount of the truck given up.

With commercial substance, the exchange is measured at fair value. The full gain is recognized and is equal to the difference between the fair value of the asset given up and its book value.


For example, assume the following values: new asset fair value 20, old asset fair value 26, cash received 6, old asset cost 30, old asset accumulated depreciation 9. The full entry is:

dr. New Truck 20;
dr. Accumulated Depreciation 9;
dr. Cash 6;
cr. Old Truck 30;
cr. Gain 5.

The gain equals the old asset's fair value of 26 and its book value of 21 (30 - 9).

6

Vik Auto and King Clothier exchanged goods, held for resale, with equal fair values. Each will use the other's goods to promote their own products. The retail price of the car that Vik gave up is less than the retail price of the clothes received.
There is commercial substance to the exchange.
What profit should Vik recognize for the nonmonetary exchange?

A. A profit is not recognized.
B. A profit equal to the difference between the retail prices of the clothes received and the car.
C. A profit equal to the difference between the retail price and the cost of the car.
D. A profit equal to the difference between the fair value and the cost of the car.

D. A profit equal to the difference between the fair value and the cost of the car.

The profit (a gain) to Vik is the difference between its fair value and its cost or carrying value. This exchange has commercial substance and was not made solely to facilitate sales. Rather, the exchange was made for promotional purposes.

7

Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets?

A.
A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price.

B.
A loss is deferred so that the asset received in the exchange is properly valued.

C.
A loss, if any, which is unrelated to the determination of the amount of the asset received should be recorded.

D.
A loss can occur only when assets are sold or disposed of in a monetary transaction.


A.
A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price.

The loss recognized on the exchange equals the book value of the asset transferred less its fair value at the time of the exchange. The fair value is less than book value. The amount recorded for the asset acquired is its fair value, or the fair value of the asset transferred plus or minus cash paid or received, whichever is more reliably determinable. By using the lower fair value of the asset transferred to measure the value of the asset acquired, the asset acquired will not be overstated above its fair value.

8

Markson Co. traded a concrete-mixing truck with a book value of $10,000 to Pro Co. for a cement-mixing machine with a fair value of $11,000. Markson needs to know the answer to which of the following questions in order to determine whether the exchange has commercial substance?
A. Does the book value of the asset given up exceed the fair value of the asset received?
B. Is the gain on the exchange less than the increase in future cash flows?
C. Are the future cash flows expected to change significantly as a result of the exchange?
D. Is the exchange nontaxable?

C. Are the future cash flows expected to change significantly as a result of the exchange?

The critical factor as to whether there is commercial substance in an exchange is when there is a significant change in the cash flows related to the asset exchanged.

9

A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange?
A. $0
B. $5,000
C. $30,000
D. $35,000

C. $30,000

The gain on an exchange of nonmonetary assets is based on the fair value and book value of the asset exchanged. The land with a fair value of $50,000 is given for machinery. The company is using the land as legal tender. The gain will be the difference between the book value and the fair value of the asset given or $50,000 - $20,000 = $30,000.

* Watch out for the asset that has a fv and the fv of the asset given up.

10

If it is not practicable for an entity to estimate the fair value of a financial instrument, which of the following should be disclosed?
I. Information pertinent to estimating the fair value of the instrument.
II. The reasons it is not practicable to estimate fair value.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

C. Both I and II.

When it is not practicable for an entity to estimate the fair value of a financial instrument, both information pertinent to estimating the fair value of the instrument and the reasons it is not practicable to estimate fair value must be provided.

11

Where in its financial statements should a company disclose information about its concentration of credit risks?
A. No disclosure is required.
B. The notes to the financial statements.
C. Supplementary information to the financial statements.
D. Management's report to shareholders.

B. The notes to the financial statements.

An entity may make required disclosures about concentrations of credit risk in either the notes to the financial statements or in the body of the financial statements. Since "The body of the financial statements" is not a choice, the notes to the financial statements is the only correct choice.

12

Whether recognized or unrecognized in an entity's financial statements, disclosure of the fair values of the entity's financial instruments is required when:
A. It is practicable to estimate those values.
B. The entity maintains accurate cost records.
C. Aggregate fair values are material to the entity.
D. Individual fair values are material to the entity.

A. It is practicable to estimate those values.

Disclosure of the fair values of an entity's financial instruments is required when it is practicable to estimate those fair values.

13

When a concentration of credit risk must be disclosed and the exact amount is uncertain, which one of the following amounts must be disclosed?

A.
Minimum amount at risk.

B.
Current period average amount at risk.

C.
Historic average amount at risk.

D.
Maximum amount at risk.

D.
Maximum amount at risk

14

Fair value disclosure of financial instruments may be made in the:
Body of
Financial Statements Footnotes to Financial Statements
Yes Yes
Yes No
No Yes
No No

Financial Statements Footnotes to Financial Statements
Yes Yes

Fair value disclosure of financial instruments may be made in either the body of the financial statements or in the footnotes to the financial statements. If in the footnotes, one note must show fair values and carrying amounts for all financial instruments.

15

Disclosure of information about significant concentrations of credit risk is required for:

A.
All financial instruments.

B.
Financial instruments with off-balance-sheet credit risk only.

C.
Financial instruments with off-balance-sheet market risk only.

D.
Financial instruments with off-balance-sheet risk of accounting loss only.

A.
All financial instruments.

All entities must disclose all significant concentrations of credit risk arising from all financial instruments, whether from a single entity or a group of parties that engage in similar activities and that have similar economic characteristics.

16

Which of the following is the correct accounting measurement and treatment under IFRS for assets classified as "Loans and Receivables"?
A. Amortized cost, with interest and amortization recognized in current income.
B. Amortized cost, with interest and amortization recognized in other comprehensive income.
C. Fair value, with changes in fair value recognized in current income.
D. Fair value, with changes in fair value recognized in other comprehensive income.

A. Amortized cost, with interest and amortization recognized in current income.

Financial assets classified as "Loans and Receivables" are measured at amortized cost, with interest and amortization related to the instrument recognized in current income. This treatment is the same as the treatment under U.S. GAAP for investments held to maturity.

17

In measuring an impairment loss for a financial asset under U.S. GAAP and under IFRS, the carrying value of the financial asset would be compared to:

Under U.S. GAAP Under IFRS
Fair value Fair value
Fair value Recoverable amount
Recoverable amount Fair value
Recoverable amount Recoverable amount

Fair value Recoverable amount

Under U.S. GAAP, an impairment loss on a financial asset is measured as the difference between the carrying value and the fair value of the asset; under IFRS, an impairment loss on a financial asset is measured as the difference between the carrying value and the recoverable amount of the asset.

18

Which of the following describes an "accounting mismatch" as that expression is used in IFRS?
A. Debts don't equal credits.
B. Liabilities exceed assets.
C. Related assets and liabilities are valued using different measures.
D. The value of a hedging instrument does not equal the value of the hedged item.

C. Related assets and liabilities are valued using different measures.

An "accounting mismatch" refers to a circumstance where related assets and liabilities are valued using different measures.

19

Under IFRS, which one of the following instruments is most likely to be treated in its entirety as a financial liability?
A. Convertible debt.
B. Convertible preferred stock.
C. Redeemable preferred stock.
D. Common stock with a preemptive right.

C. Redeemable preferred stock.

Under IFRS, redeemable preferred stock would likely be treated in its entirety as a financial liability because the stock can be redeemed (repurchased) by the issuing corporation at its discretion. Since the preferred shares can be redeemed at the discretion of the issuing corporation, it is not treated as equity, but rather as a liability.