M6 - Nonmonetary Transactions

Question 1

Nonmonetary exchanges that lack commercial substance under USGAAP are transactions that are exceptions to the general rule of basing the measurement value of the exchange on the fair value. When cash (boot) is received and it is less than 10% of the total consideration, a proportional amount of the gain is recognized. (true or false)

Answer 1

true

Question 2

When there is no boot, transactions that lack commercial substance are recorded at carrying value, and no gain is recognized for accounting purposes. (true or false)

Answer 2

true

Question 3

Boot is PAID (and is less than 25% of the total consideration)=

Recognize proportional gain
No Gain
Recognize proportional Loss
No Loss

Answer 3

No Gain

Question 4

Boot is RECEIVED (and is less than 25% of the total consideration)=

Recognize proportional gain
No Gain
Recognize proportional Loss
No Loss

Answer 4

Recognize proportional gain

A ratio is calculated:

Total consideration received

and that portion of the total gain is recognized

Question 5

Boot is more than 25% or more of the total consideration=

Answer 5

Both parties account for the transaction as a monetary exchange, and gains and losses are recognized in their entirety by both parties to the exchange

Question 6

In order to have commercial substance:

Answer 6

either

1) the risk, timing, and amount of the expected future cash flows from the asset transferred differs significantly from the risk, timing, and amount of the expected future cash flows from the asset received, or
2) the entity-specific value (based on the company’s expectations of value of the asset and not of the marketplace) of the asset received differs significantly (in relation to the fair values of the assets exchanged) from the asset transferred.

Question 7

When a nonmonetary transaction has commercial substance, gains and losses are recognized based on the difference between the fair value and the book value o the asset given up. (true or false)

Answer 7

true

Question 8

The proper accounting for nonmonetary exchanges that are deemed to have commercial substance is correctly described as deferring gains and recognizing losses immediately. (true or false)

Answer 8

False,

It recognizes gains and losses immediately.

For nonmonetary exchanges that contain commercial substance, meaning that the amount and timing of future cash flows changes as a result of this exchange, gains and losses are recognized immediately.

Question 9

If a nonmonetary exchange has commercial substance, the transaction is accounted for using the fair value of the asset surrendered or received, whichever is more evident. (true or false)

Answer 9

true

Question 10

How to calculate if boot PAID is more than 25% of the consideration given:

Answer 10

Boot + FV of the asset given = the total consideration

Total consideration given

If that equals more than 25