FAR 2 - Accounting for Nonmonetary Exchanges

Question 1

Journal entry to record exchange having commercial substance?

Answer 1

Dr: New Asset ( AT FAIR VALUE + CASH GIVEN**)
Dr: Accumulated depreciation of your asset given up
Dr: Cash received
Dr: Loss (if any)
Cr: Old asset at historical (your asset on the books)
Cr: Cash given
Cr: Gain (if any)

Question 2

Define an exchange having commercial substance?

Answer 2

An exchange has commercial substance if the future cash flows change as a result of the transaction.

Building for car —? Huge cash flow difference

Question 3

How does IFRS define nonmonetary and monetary exchanges?

Answer 3

Nonmonetary exchanges are characterized as exchanges of similar assets. Monetary exchanges are characterized as dissimilar assets.

Dissimilar assets - record gain and loss
Similar assets - don’t record gain and loss

Question 4

Define an exchange lacking commercial substance?

Answer 4

1) No change in future cash flows

2) Fair value cannot be determined

Question 5

How do you record gains in exchanges lacking commercial substance if NO BOOT IS RECEIVED?

Answer 5

NO BOOT IS RECEIVED = NO GAIN

Record the transaction given and received at BOOK VALUE.

Question 6

How do you record gains in exchanges lacking commercial substance if BOOT IS PAID?

Answer 6

BOOT IS PAID = NO GAIN

Record the transaction given and received at BOOK VALUE.

Question 7

How do you record gains in exchanges lacking commercial substance if BOOT IS RECEIVED? LESS THAN 25% of consideration

Answer 7

If boot received is 25% LESS than consideration, recognize that proportional amount as gain.

Gain = Realized gain x (Boot received / FV of the amount you gave)

1) Realized gain = FV of the asset you gave - BV of the asset you gave
2) (Boot received / FV of the amount you gave)

Question 8

How do you record gains in exchanges lacking commercial substance if BOOT IS RECEIVED? MORE THAN 25% of consideration

Answer 8

If boot received is 25% MORE than consideration, recognize the full amount as gain and loss by BOTH PARTIES.

Gain = Realized gain x (Boot received / FV of the amount you gave)

1) Realized gain = FV of the asset you gave - BV of the asset you gave
2) (Boot received / FV of the amount you gave)

Question 9

How are gains and losses recognized for involuntary conversions (fire loss, theft).

Answer 9

Recognize full amount of gain and loss