Accounting for Nonmonetary Exchanges

Question 1

US GAAP requires that exchanges of nonmonetary assets be categorized into one of two groups?

Answer 1

• Those that have ‘commercial substance’

- Those that have ‘lack commercial substance’

Question 2

What is the circumstances exchnages have commercial substance?

Answer 2

• An exchange has commercial substance if the future cash flows change as a result of the transcation
• If the economic position of the two parties changes because of the exchange, then the exchange has ‘commercial sbustance’ –> FV approach is used

Question 3

J/E for exchange

Answer 3

DR: New asset (FV of consideration given)
DR: Accumulated depreciation of old asset
DR: Cash received
DR: Loss (if any)
CR: Old asset at historical cost (BV)
CR: Cash given
CR: Gain (if any)

Question 4

How are gains and losses recognized in exchanges having commercial substance?

Answer 4

• Always recognized

- computed as the difference between FV and BV of old asset

Question 5

When is an exchange considered lacking commercial substance?

Answer 5

• There is no change in cash flows

- Fair value cannot be determinned

Question 6

Is loss always recognized in an exchange lacking commercial substance?

Answer 6

YES

Question 7

How are gains and losses treated in a involuntary nonmonetary asset conversion to cash?

Answer 7

-The entire gain or loss is recognized for financial accounting purposes