F3 M6 Flashcards
Exchanges of nonmonetary assets are recognized as having commercial substance or
lacking commercial substance
The price of the new machine or stock received is always the PLUG when two
assets are exchanged w/ or w/o boot received or paid (take the price of the old
asset, cash paid, FV of old asset, and acc depr into consideration for an exchange
w/commercial substance)
When there is commercial substance (which is when there is a change in cash flow
resulting from the transaction), the parties should recognize a gain or loss on the
exchange (monetary exchange). If there is no commercial substance, record the
acquired asset at the book value of the asset given up in the exchange
(nonmonetary exchange)
1: When no boot is exchanged, no gain is ever recognized (it can be calculated by
doing FV - CV of asset, but it is not recognized; debit new machine and credit old
machine for BV of old asset)
It is literally just substituting what the comp has on the books for a new asset at the
same price
2: When boot is paid and <25%, no gain is ever recognized. To find out if it’s less than
25%, divide boot paid / FV of exchange (debit new asset as the plug, credit old asset
at CV and credit cash paid)
The FV of the exchange = FV of new asset + cash received OR FV of new asset +
cash paid (this is bc additional costs are ALWAYS included in the cost of an
asset)
3: When boot is received and <25%, SOME gain is recognized. To find out if it’s less
than 25%, do the same as above. Then, I will do FV of old asset - CV of old asset (this is
how I normally calculate gain, but it is not ALL recognized here). Finally, multiply the
unrecognized gain x (boot received / FV of exchange) to determine how much gain will
be recognized
Some gain is ALWAYS recognized when boot is received
4: When boot is received and >25%, ALL gain is recognized (this is also considered a
monetary exchange)
If there is a loss (FV < CV on old machine), then I must recognize it no matter what
(debit new machine as the plug, debit loss, and credit CV of old machine
An involuntary conversion occurs when your property is destroyed, stolen, condemned,
or disposed of under the threat of condemnation and you receive other property or
money in payment, such as insurance or a condemnation award
The $ received in an involuntary conversion is debited, CV of old asset is credited and
gain is credit ($ received - CV of old asset)
If a problem shows that two goods traded are very similar and cash is paid, it is likely
that the gain recognized will be 0 because the exchange has 0 commercial substance
(gain could be recognized if >25%; then it would be a monetary exchange)
If boot is ever PAID and we are the company who is paying it, then no gain will ever be
recognized if it is under 25%
