CHAPTER 10: NONMONETARY EXCHANGES
Note: if cash exchanged in the transaction is 25% or more of the
transaction, treat as a MONETARY transaction, where both parties
recognize full gain or loss.
Nonmonetary Exchanges - Exchange of PPE for other PPE (exchange of
nonmonetary assets): the following questions need to be asked before recording
the exchange:
1. Can fair market value (FMV) be determined?
No: record the acquired asset at book value of assets given up (no
gain or loss is recognized.
Yes: continue with the additional questions below.
2.
If FMV is determinable - is there a gain or a loss on the exchange?
To find G/L, compare FMV to BV:
(1) FMV of assets given up - BV of assets given up
or (2) FMV of assets received - BV of assets given up
Use equation (1) unless FMV of assets received is more clearly evident. If
cash is given or received, include it in the FMV and the BV; cash has a
FMV = BV.
If difference is a loss, recognize loss.
If difference is a gain, an additional question must be asked:
3.
Does the exchange have commercial substance? (significant change in
future cash flows as a result of the exchange)
Yes: Use fair value for the exchange and recognize the gain.
No: (No commercial substance) Was some cash (<25%)involved?
Yes: recognize portion of gain.
No: no gain recognized.
In all the transaction alternatives, the amount of gain or loss recognized
determines the recorded value of the asset received.
EXCHANGE OF PROPERTY- EXAMPLE PROBLEMS
(All situations below assume that FMV can be estimated on asset given.)
A. Gain Situation (no cash received) - commercial substance
(received land; gave trucks and $17,000 cash)
FMV
BV
Given
Given
Trucks (old)
49,000
Trucks cost
64,000
Cash
17,000
Accum. Depr.
(22,000)
66,000
Cash
17,000
59,000
Recognize Gain = $7,000 (since commercial substance)
Basis for new asset = FMV Given = $66,000
Journal Entry:
Land
Accum. Depr. -Trucks
Trucks
Gain
Cash
66,000
22,000
64,000
7,000
17,000
B. Gain situation – (no cash received) NO commercial substance
(received trucks; gave trucks and $17,000)
Trucks (old)
Cash
FMV
Given
49,000
17,000
66,000
BV
Given
Trucks cost
64,000
Accum. Depr. (22,000)
Cash
17,000
59,000
Gain = 7,000 --- Not recognized because no commercial substance in the exchange (no increased
future cash flows)
Basis = Book Value Given = 59,000
Journal Entry:
Trucks (new)
A/D -Trucks (old)
Trucks (old)
Cash
59,000
22,000
64,000
17,000
C. Gain situation (cash received) YES -commercial substance (cash received $7,000, and truck given with FMV of $49,000). Note treatment of cash received in
exchange:
FMV
BV
Given
Given
Trucks (old)
49,000
Trucks cost 57,000
Cash received ( 7,000)
Accum. Depr. (22,000)
42,000
Cash recvd. (7,000)
28,000
Total Gain = 14,000 (recognize since commercial substance)
Journal Entry:
Trucks (new)
42,000
Cash
7,000
A/D (old)
22,000
Trucks (old)
57,000
Gain
14,000
D. Gain situation – no commercial substance and cash received (7/49 = 14.28%.
recognize partial gain; 14,000 x 7/49 = 2,000
Journal Entry:
Trucks (new)
Cash
A/D (old)
Trucks (old)
Gain
30,000
7,000
22,000
57,000
2,000
E. Loss situations - as long as loss (and FMV) determinable - recognize loss.
Old asset
Cash given
FMV
Given
6,000
7,000
13,000
BV
Given
Asset cost
12,000
Accum. Depr. (4,000)
Cash given
7,000
15,000
Loss = $2,000 (recognize since FMV is determinable)
Basis = FMV Given = $13,000
Journal Entry:
New Asset
13,000
Loss on Exchange
2,000
Accum. Depr. (old)
4,000
Old Asset (Cost)
12,000
Cash
7,000