FAR - Nonmonentary exchanges (asset for asset with cash i.e. boot) Flashcards Preview

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Flashcards in FAR - Nonmonentary exchanges (asset for asset with cash i.e. boot) Deck (20):
1

What is the journal entry for non-monetary exchanges (has commercial substance)?

Dr. New asset (FV of old asset given up + cash paid out -OR- New asset's FV if given)
Dr. Accumulated dep. on asset giving away
Dr. Cash Received
Dr. Los (if any)
Cr. Old asset at Hist. cost or Purch. cost
Cr. Cash given
Cr. Gain (if any)

FYI - Example (GAIN):

Dr. Building 65,000 (45,000 old asset FV + 20,000 cash)
Dr. Accu. Dep. - cars 62,000
Cr. Cars 102,000 (His. cost)
Cr. Gain on sell car 5,000
Cr. Cash 20,000

FYI - Example (LOSS):

Dr. Building 58,000 (38,000 old asset FV + 20,000 cash)
Dr. Acc. Dep. 62,000
Dr. Loss 2,000
Cr. Cars 102,000
Cr. Cash 20,000

2

What does commercial substance mean in a non-monetary exchange?

Commercial subustace cash flows from the exchange between both parties have changed significantly.

The change to both parties can be from Risk, Timing, or cash flow amounts.

3

Commercial substance - non-monetary exchange: how to calculate the gain on giving away your old asset?

Old asset:

FV of old asset
- [Cost of old asset - accumulated depreciation]
---------
= Gain or loss

Note: Book value = [cost of old asset - accumulated depreciation]

4

U.S. GAAP vs. IFRS:

Under IFRS, non-monetary exchanges are characterized as exchanges of ____ assets and exchanges of _____ assets.

Exchnges of ___ assets are regread as exchanges that generate revenue and are accounted for in the same manner as exchanges having COMMERCIAL SUBSTANCE under U.S. GAAP.

Exchanges of ___ assets are not regarded as exchanges taht generate revenue and no gains are recognized.

U.S. GAAP vs. IFRS:

Under IFRS, non-monetary exchanges are characterized as exchanges of SIMILAR assets and exchanges of DISSIMILAR assets.


Exchnges of DISSIMILAR assets are regread as exchanges that generate revenue and are accounted for in the same manner as exchanges having COMMERCIAL SUBSTANCE under U.S. GAAP.

Loss
----------
Dr. new asset (at new asset's FV)
Dr. Loss
Cr. Old asset (at CV)
Cr. cash paid out

Gain
-------
Dr. new asset (at FV)
Dr. Cash received
Cr. Old asset (at CV)
Cr. Gain (at entire amount)


Exchanges of SIMILAR assets are not regarded as exchanges taht generate revenue and no gains are recognized.

5

Non-monetary exchanges lacking commercial substances -

lack commercial substance means?

Lacking commercial substance is where an exchange does not lead to a significant in cashflow between to the parties.

6

(Lack commercial substance)

Journal entry for No boot = no gain recognized scenario.

Debit Manchine New $10,000
Credit Old Machine $10,000

* $10,000 = $12,000 old asset FV - $10,000 old asset BV

7

(Lack commercial substance)

Journal entry for Boot Paid = No gain

Dr. Machine New $12,500 (plug)
Cr. Machine Old (BV) $10,000 @ CV
Cr. Cash paid 2,500

* First: CR machine old at its book value. CR the cash paid out.

Then: Dr. Machine new value via Machine old BV + cash paid out ($10,000 + 2,500)

8

(Lack comm'l subst.)

Journal entry on Boot less than 25%

Dr. Machine New 7,917
Dr. Cash received 2,500
Cr. Machine old 10,000 (at CV)
Cr. Gain 417

417 = (Old asset FV - old asset CV) x (cash / old asset FV)
So: 417 = (12,000 FV - 10,000 CV) x ($2,500 / 12,000)
417 = (12,000 FV - 10,000 CV) x 21%
417 = $2,000 x 21%

9

(Lack comm'l subst.)

Formula on Boot less than 25%

Proportional gain recognized formula

[Old asset FV - Old asset CV] x (Cash received / old asset FV)

Rememer: use only the old asset giving away to calculate GAIN proportion recognized. NEVER used the new asset you're receiving.

10

(Lack commercial substance)

Journal Entry on Boot received > 25% = All gain recognized

Dr. Machine New 6000 plug
Dr. Cash 5,000
Cr. Machine A 10,000 at CV
Cr. Gain 1,000

Calculate gain: Old machine FV - Old machine CV
= 11,000 - 10,000
= 1,000 gain

(5,000 cash / 10,000 old asset FV) > 0.25 or not
--> 0.45 > 0.25 (recognize entire gain)

Note:
First: Debit, cash received at 5000,
First: Credit 10,000 old machine CV

Then: calculate Gain see if above 25% (Cash / old asset FV)

Then: Debit Mahine new (which is $6,000. So: 6,000 machine new + 5,000 cash received = 11,000 (Machine a cv + gain)

11

(Lack commercial substance)

Journal Entry on Losses = recognize entire loss in full

Dr. Machine new at FV 8,000
Dr. Loss 2,000
Cr. Machine old 10,000

Loss = old asset FV - old asset CV
Or: Loss = 8,000 old asset FV - 10,000 old asset CV
Loss = 2,000 loss

Rememer: calculation on loss is Old asset FV - OLD asset CV.
It's not New asset FV - old asset CV.

12

What is the formula for non-monetary exchange to find gain or loss (commercial substance)?

New Assets fair value
- [Cash paid out + old asset carry value]
---------------------------------------------
= Gain or loss

13

What is the criteria on commercial substance in exchanging two non-monetary assets?

Do you have to meet all of the criteria or one of them?

Criteria on commercial substance:

(1) Configuration (risk, timing, and amount) of future Cash-flow of assets received DIFFERS significantly from configuration of future cash flows of assets transferred.

(2) Entity-specific value of the asset(s) received differs from the entity specific value of the asset(s) transferred, and the difference is signification in relation to the fair values of assets exchanged.

Meet one of these only. Do no have to meet all.

FYI - dumb down version on criterial:
Received new asset CFLO (asset's new FV)
is significantly DIFFERENT than
OLD ASSET CFLO (asset fair value + cash)

14

IFRS - Exchange occurs between two different non-monetary assets (a building trade for car)

When the building's CV is same as car's FV, then the loss occurs and it's equal to cash paid out, TRUE or FALSE?

Also:

When the building's CV is same as car's FV, then the gain occurs and it's equal to cash received, TRUE or FALSE?

Under IFRS, exchanges of dissimilar assets are regarded as exchanges that generate revenue and all Gains and Losses are recognized. In this problem, the entity gave up cash and an asset in exchange for equipment with a fair
value equal to the carrying value of the asset given up.

The following JE can be used to illustrate this problem, assuming that the fair value of the new equipment is $10,000 and that $1,500 in cash was paid:

Loss occur: New asset FV = old asset CV, then cash paid out = loss amount.

Dr. Equipment received $10,000
Dr. Loss on exchange 1,500
Cr. Asset given 10,000
Cr. Cash paid 1,500

The NEW equipment is recorded at Fair Value and the asset is removed from the books at its equivalent Carrying Value, along with the cash paid. To balance the journal entry, a loss equal to the cash given up must be recorded.


Gain: FV new asset and Old Asset CV same. Cash received = the Gain (see below).

Dr. Equipment Received $10,000
Dr. Cash received 1,500
Cr. Asset Given 10,000
Cr. Gain 1,500

15

What is the Journal entry on a "Commercial substance" non-monetary exchange in exchanging a machine at cost of $250,000 (depreciated cost at $220,000; no Fair value known) for a Land asset at a Fair value of $150,000 (acquired cost is $109,000) and you also receive cash of $20,000?

Journal Entry - Commercial Substance

Dr. Land $150,000 (entire FV given)
Dr. Acc. Dep $30,000
Dr. Cash $20,000
Cr. Machine $250,000 (cost)
Cr. Gain 50,000

16

In the exchange of nonmonetary assets that lacks commercial substance:

If boot is paid, then all realized ___ are fully recognized.

If boot is received, then gain is ____ recognized depending on cash received divide by old asset's Fair value (Cash received / Old asset's FV > 25% recognize all gains. Cash received/Old asset's FV > gain partially recognized).

If boot is paid, then all realized LOSSES are fully recognized.

If boot is received, then gain is PARTIALLY recognized depending on cash received divide by old asset's Fair value (Cash received / Old asset's FV > 25% recognize all gains. Cash received/Old asset's FV > gain partially recognized).

17

ABC Company paid $1,000 cash and traded an inventory which had a carrying amount of $20,000 and a fair value of $21,000, for other inventory in the same line of business with a fair value of $22,000.

(1) Is this a "commercial substance" or "lack commercial substance" non-monetary exchange? Explain why.

What is the gain or (loss) related to this exchange?

This is "lack commercial substance." This because

ABC company's
* Paid out cash = $1,000
* Old inventory's FV = $21,000
= the same as the New (other) inventory FV of $22,000

Paid out cash ($1,000) + old inventory FV ($21,000) = $22,000
New inventory FV = $22,000

Since the values here (i.e. the cash flows of $$ values coming in and out in this exchange) does not differ significantly, therefore, no commercial substance (or lack commercial substance)

(2) Dr. New inventory $22,000
Cr. Cash $1,000
Cr. Old inventory $21,000

Therefore, $0.00 gain or loss.

18

XYZ company exchange a truck that has $12,000 carry value and $20,000 fair value for a truck and $4,000 cash. The FV of truck received is $16,000.

(1) Is this a "commercial substance" or "lack commercial substance" non-monetary exchange? Explain why.

(2) At what amount XYZ company record the truck received in the exchange under U.S. GAAP? How about gain or loss?

(1) No commercial substance a.k.a. lack commercial substance.

Reason: this because:
* Cash received of $4,000
* And old truck's CV of $12,000
= Both add up to equal $16,000
= This $16,000 is the same as truck received's fair value $16,000.

Therefore, no commercial substance.

(2) Amount to record the new received truck under US GAAP:

Dr. Cash $4,000
Dr. New truck $9,600 (plug)
Cr. Old Truck $12,000 @ CV
Cr. Gain* 1,600

* Cash / old truck FV = $4,000 / $20,000 = 0.20
* 0.20 x ($20,000 old truck FV - $12,000 old truck CV)
* 0.20 x $8,000
* = $1,600 GAIN

Therefore:
* Amount to record the new truck = $9,600
* FYI - Gain on this "lack-commercial substance" exchange is = $1,600

19

On March 1, year 1, Base Company exchange a machine for 25 shares of Acer Company's common stock. On that date, the machine's carry amount is $2,500 and its fair value was $3,000. Also, the book value of Acer's stock is $60 per share. On Dec. 31, year 1, Acer had 300 shares of common stock outstanding and its book value is $50 per share. What amount should Base company report in its December 31, Year 1, balance sheet as investment in Ace assuming the transaction had commercial substance?

Answer: $3,000 (investment in Acer company)

Explanation: Since this is a commercial substance then we have:

Dr. Investment in Acer Company $3,000
Cr. Old truck $2,500
Cr. Gain 500**

** This is only a possibility since this problem did not specify anything else on a gain or loss is recorded when exchanging old asset for common stock.

Note: Book value in this commercial substance non-monetary transaction does not involve Book Value of the common stock since the Fair value is presented. Had the fair value not shown up, then book value of the common stock given to Base company would be used instead.

20

True or false

The accounting for non-monetary exchanges uses the fair value of asset surrendered (old asset giving away) -OR- the fair value of new asset received.

True.

Depending on the CPA exam question, if the New asset received has a FV being shown. Use that for (Debit New asset at FV).

If the new asset does not have a FV, then use the Old asset's FV + any cash paid for:

Dr. New asset (old asset FV + any cash paid out)

-or-

Dr. New asset (at its own FV)

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