F3 - M6 - Nonmonetary Transactions

Question 1

Nonmonetary - Commercial Substance

Answer 1

Nonmonetary = like a trade or swap

Either HAVE COMMERCIAL SUBSTANCE or LACKING COMMERCIAL SUBSTANCE

Commercial Substance = Future cash flows change, economic position of two parties change, FAIR VALUE approach is used, ALL G/L Recognized

FV of assets given u[p = FV of assets received

Question 2

Commercial Substance - Recognizing Gains / Losses

Answer 2

(FV old - BV old) to Cost - AD

Example: Car with FV of 45k, BV (Cost - Ad) of 40k, = gain of 5k.

Question 3

Commercial Substance - Calculation of Basis of Acquired Asset

Answer 3

FV given up is COST

Ex: FV of Cars given up is 45k plus cash 20k, = Building cost $65k, FV received

Gain Example (5k on cars)
Dr. Building
Dr. Accumulated Depreciation - Cars 
Cr.    Cars 
Cr.    Gain on disposal of cars 
Cr.    Cash - Paid 

Loss Example (5k on cars)
Dr. Building
Dr. Accumulated Depreciation - Cars
Dr. Loss  
Cr.    Cars 
Cr.    Cash - Paid

Question 4

IFRS

Answer 4

“Nonmonetary” Transactions
Dissimilar - G/L recognized
Similar - No gain recognized

Question 5

Lacking Commercial Substance

Answer 5

Cash flows NOT expected to change; FV - BV = G/L

Question 6

Lacking Commercial Substance - Gains - “Boot”

Answer 6

Boot = Cash, additional cash to make deal even

No Boot is Received = No Gain

Boot is Paid = No Gain (less than 25% rule); Boot “paid” is less than 25% of total consideration

Boot is received = Recognize proportional gain (less than 25% rule), boot “received” is a proportional; amount of gain recognized

Question 7

Lacking Commercial Substance - “Loss”- “Boot”

Answer 7

Rule of conservatism - loss should be recognized

Question 8

No Boot = No Gain Recognized Example - “lacking”

Answer 8

Machine A for Machine B, A has CV of 10k and FV of 12k; B has FV of 12k. Since no boot, no gain recognized (2k gain 10k -12k)

JE (basis is FV less deferred gain)
Dr. Machine BZ for 10k
Cr. Machine A for 10k

Question 9

Boot is Paid (less 25%) = No Gain - “lacking”

Answer 9

Machine A and $2,500 in exchange for Machine B, A CV s 10k, FV 12k; Machine B FV is 14,500

Dr. Machine B for 12,500
Cr. Machine A for 10k
Cr. Cash 2500

Question 10

Boot is Received (less 25%) = Proportional Gain Recognized - “lacking”

Answer 10

Recognized gain = realized gain x (boot received / FV received)

Question 11

Boot is Received (greater 25%) = All Gain Recognized - “lacking”

Answer 11

Both side recognize

Question 12

Involuntary Conversions

Answer 12

Fire loss, theft or condemnation to cash, entire gain / loss is recognized

Question 13

Gain

Answer 13

FV Asset Given Up GREATER than BV Asset Given Up

Question 14

Loss

Answer 14

FV Asset Given Up LESS than BV Asset Given Up

Recognize Entire Loss

Question 15

Commercial Substance

Answer 15

Recognize Entire GAIN

Question 16

No Commercial Substance

Answer 16

No Cash = No Gain
Cash Paid = No Gain

Cash Received

• Less than 25%, Recognize Proportional Gain
• Greater than 25%, Recognize Entire GAIN