D. PROPERTY, PLANT, AND EQUIPMENT 04 Non Monetary Exchanges Flashcards
D. PROPERTY, PLANT, AND EQUIPMENT
Non-Monetary Exchanges
Define and 2 types:
Non-Monetary Exchanges
- This is when one asset is exchanged for another asset.
2 Types:
With Commercial Substance:
- referred to as “Commercial Substance”
- if the asset acquired will significantly change the cash flows to the company, or
- if the asset acquired in the exchange is significantly different than the item exchanged.
Without Commercial Substance:
- referred to as “lacking Commercial Substance”
- If the asset received in the exchange doesn’t really change anything.
D. PROPERTY, PLANT, AND EQUIPMENT
Non-Monetary Exchanges
Accounting treatment for exchanges WITH commercial substance:
2 types:
Accounting treatment for exchanges WITH commercial substance:
If FV of new asset can be determined,
- Recognize new asset at the fair value of old asset,
- plus cash paid, or less cash received.
- Recognize gains/losses in Full.
- gain/loss: difference between FV & BV (treated like a sale)
- Recognize cash paid or received
- Remove old asset
If neither asset’s fair value can be determined,
- Recognize the new asset at the BV of the old asset
- plus cash paid, or less cash received.
- Do not recognize gain or loss
- Recognize cash paid or received
- Remove old asset
Steps:
- Recognize new asset
- Recognize gain or loss (or don’t recognize)
- Recognize cash paid or received
- Remove old asset
Example:
ABC exchanges some equipment with DEF. ABC’s assets had a book value of $80,000 and FV of $100,000. ABC also gives DEF $30,000 as part of the exchange.
ABC would recognize a gain of $20,000 on this exchange. Note that regardless of the details of the equipment received from DEF, ABC’s gain will be equal to the difference in the FV and the book value of the asset it exchanged.
Example:
ABC exchanges some equipment with DEF. ABC’s asset had book value of $80,000($120,00 cost and $40,000 acc dep) and FV of $100,000. ABC also gives DEF $30,000 as part of the exchange. DEF’s property has a fair value of $120,000, cost of $150,000 and acc dep of $40,000.
ABC will record the asset received at $130,000(total FV given up) on its books. DEF will record the asset received from ABC at $90,000 ($120,000 FV - $30,000 cash received).
ABC’s Journal Entry:
Equipment(received) 130,000 (FV plus Cash given up)
Accumulated depreciation 40,000
Equipment(exchanged) 120,000
Cash 30,000
Gain on exchange 20,000
DEF’s Journal Entry:
Equipment (received) 90,000 (120,000 - cash received)
Accumulated depreciation 40,000
Cash 30,000
Equipment(exchanged) 150,000
Gain on exchange 10,000
D. PROPERTY, PLANT, AND EQUIPMENT
Non-Monetary Exchanges
Exchanges WITHOUT commercial substance
3 types
Notes:
- First determine if Gain or Loss.
-
A loss will determine varied treatment of
- New Asset only.
-
A gain with cash received or not received will determine varied treatment of
- New Asset, and
- how to recognize Gain.
If there is a loss with cash paid or received.
- Recognize new asset at the FV of new asset
- Recognize the loss in Full
- Recognize cash paid or received
- Remove old asset
If there is a gain but no cash is received,
- Recognize the new asset at the BV of the old asset
- plus any cash you paid.
- No gain is recognized
- Recognize cash paid
- Remove old asset
If there is a gain and you received cash,
- Recognize the gain in proportion to the cash received
- cash received / FV of old asset = %
- multiply % by gain resulting in amount to be recognized gain
- Recognize new asset at FV less the unrecognized portion of the gain.
- FV - (gain less recognized portion)
- Recognize cash received
- Remove old asset
IF the proportion of cash received to total consideration received is more than 25%,
- considered a monetary transaction
- record the gain in full and the asset acquired at FV.
Examples:
Steps:
- Recognize new asset
- Recognize gain or loss (or don’t recognize)
- Recognize cash paid or received
- Remove old asset
No Commercial Substance, Loss, Cash paid
Cost of old asset, $40,000
Accumulated depreciation, $12,000
Fair value of new asset $30,000
Cash of $6,000 is paid to even the exchange
The implied fair value of the old asset is $24,000 ($30,000 fair value of new asset −$6,000 cash paid). A $4,000 loss is evident: $28,000 book value of old asset—$24,000 fair value of old asset. Losses are recognized in full and the new asset is recorded at fair value.
Plant Asset (new) 30,000
Acc Dep 12,000
Loss 4,000
Plant asset (old) 40,000
Cash 6,000
No Commercial Substance, Loss, Cash Received
Cost of old asset, $40,000
Accumulated depreciation, $12,000
Fair value of new asset $20,000
Cash of $3,000 is received to even the exchange
The implied fair value of the old asset is $23,000 ($20,000 fair value of new asset + $3,000 cash received). A $5,000 loss is evident: $28,000 book value of old asset −$23,000 fair value of old asset. Losses are recognized in full and the new asset is recorded at fair value.
Plant asset 20,000
Acc Dep 12,000
Cash 3,000
Loss 5,000
Plant Asset 40,000
No Commercial Substance, Gain, Cash Received
Cost of old asset, $40,000
Accumulated depreciation, $30,000
Fair value of new asset $20,000
Cash of $3,000 is received to even the exchange
The implied fair value of the old asset is $23,000 ($20,000 fair value of new asset + $3,000 cash received). A $13,000 gain is evident: $23,000 fair value of old asset – $10,000 book value of old asset. Cash represents ($3,000/($3,000 + $20,000)) or 13% of the value of the transaction. 13% of the old asset has been “sold“ for cash allowing 13% of the gain to be recognized: 13%(13,000) = $1,690. The unrecognized gain is $13,000 – $1,690 = $11,310. The new asset is recorded at fair value less the unrecorded gain = $20,000 – $11,310 = $8,690.
Plant asset (received) 8,690
Acc dep 30,000
Cash 3,000
Plant asset (given up) 40,000
Gain 1,690
No Commercial Substance, Gain, Cash Received, Proportion Represented by Cash > 25%
Cost of old asset, $40,000
Accumulated depreciation, $30,000
Fair value of new asset $20,000
Cash of $10,000 is received to even the exchange
The implied fair value of the old asset is $30,000 ($20,000 fair value of new asset + $10,000 cash received). A $20,000 gain is evident: $30,000 fair value of old asset – $10,000 book value of old asset = $20,000. Cash represents ($10,000/($10,000 + $20,000)) of the value of the transaction or 33%, which is more than 25%. This firm has “sold“ so much of its asset that the entire transaction is considered a monetary transaction. The entire gain is recognized and the new asset is recorded at fair value.
Plant asset (received) 20,000
Acc Dep 30,000
Cash 10,000
Plant asset (given up) 40,000
Gain 20,000
