Flashcards in FAR 62 - Nonmonetary Exchange Deck (21):
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. 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.
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. 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.
T/F: Under GAAP, exchanges of inventory made to facilitate sales are an exception to fair value measurement. No gain or loss is recognized and the inventory received is valued at the book value of the inventory given up plus cash paid.
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?
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.
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. Gains and losses from nonmonetary exchanges that have commercial substance are recognized immediately.
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. 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.
T/F: The asset acquired in a nonmonetary asset exchange is always recorded at its market value.
Fair value is not always the appropriate valuation for nonmonetary assets. Sometimes book value, or book value +/- cash paid/received is used to calculate the appropriate value.
T/F: Gains can never be recognized on similar nonmonetary asset exchanges.
They can be recognized when fair value of asset exchanged exceeds the book value of the asset exchanged.
T/F: A firm owns an asset with a book value of $4,000 and fair value of $5,000. Cash of $2,000 is paid. The exchange has commercial substance. Therefore, the firm will record the incoming asset at $7,000.
T/F: A firm owns an asset with a book value of $4,000 and exchanges it for an asset with a fair value of $5,000. Cash of $2,000 is received. The exchange has commercial substance. Therefore, the firm will record the incoming asset at $5,000.
T/F: In an exchange of nonmonetary assets, the new asset acquired is never recorded at the book value of the old asset exchanged.
Sometimes this may be a more appropriate value for the asset and can be used.
Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values.
The exchange lacks commercial substance.
As a result of the exchange, Slate should recognize
A. A gain equal to the difference between the fair value and the carrying amount of the land given up.
B. A gain in an amount determined by the ratio of cash received to total consideration.
C. A loss in an amount determined by the ratio of cash received to total consideration.
D. Neither a gain nor a loss.
B. When commercial substance is lacking, gains are recognized in proportion to the amount of cash received.
Talse would recognize neither a gain nor a loss.
Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell's truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway's truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?
$3,700 When a transaction lacks commercial substance and cash is paid, the new asset is recorded at the book value of the old asset plus any cash given. Campbell has the same economic position as before the exchange - a different truck used in the same manner and $700 less cash. The new truck is the BV of the old asset ($3,000) plus the cash paid ($700) or $3,700.
In an exchange of plant assets, Transit Co. received equipment with a fair value equal to the carrying amount of equipment given up. Transit also contributed cash.
The exchange lacks commercial substance.
As a result of the exchange, Transit recognized
A. A loss equal to the cash given up.
B. A loss determined by the proportion of cash paid to the total transaction value.
C. A gain determined by the proportion of cash paid to the total transaction value.
D. Neither gain nor loss.
A. The fair value of the new asset equals the old asset's book value. Because cash was paid, the fair value of the old asset is less than the fair value of the new asset.
Therefore, the fair value of the old asset is also less than the old asset's book value resulting in a loss.
Using dollar amounts, assume the fair value of the new asset is $10. The book value of the old asset is also $10 by assumption. Assume Transit paid $2 cash.
Then the fair value of the old asset is $8 implying a loss of $2, the amount of cash paid. Even without commercial substance, losses are recognized in full.
May Co. and Sty Co. exchanged nonmonetary assets. The exchange did not culminate an earning process for either May or Sty (the exchange lacked commercial substance). May paid cash to Sty in connection with the exchange.
The book value of the asset exchanged exceeded its fair value for both firms. Therefore, a loss on the exchange should be recognized by
The fair value of each asset is less than book value implying that both firms have a loss. Losses are recognized in full regardless of whether there is commercial exchange.
T/F: When a nonmonetary asset is exchanged for another nonmonetary asset and a loss is implied, the loss cannot be recognized if the exchange lacks commercial substance, and the asset acquired is reported at the book value of the old asset plus cash paid or less cash received.
It can be recognized
T/F: Losses are recognized in full on nonmonetary exchanges, when the exchange lacks commercial substance and cash is received on the exchange.
In a barter transaction where advertising services provided are exchanged for advertising services received, under which of the following situations can the advertising provider recognize revenue for the services performed? Assume the accounting is under IFRS guidelines.
A. When the advertising services in the exchange are similar
B. When the fair value of the advertising services received can be reliably measured
C. When there is a nonbarter transaction for similar advertising services that can be reliably measured with the same counterparty
D. When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty
D. The fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty (SIC Interpretation 31, para 5).
T/F: Under IFRS, donated assets are recorded as a loss.
IFRS does not specifically address the accounting when an asset or other resource is donated. U.S. GAAP requires that the fair value of the donated asset or service be recognized as an expense and a gain (or loss) is recognized on the revaluation of the donated item.
T/F: Under IFRS, a gain is recognized on barter transactions in advertising by reference to a non-barter transaction.