Nonmonetary Exchanges

Question 1

There are two types of Nonmonetary Exchanges:

Answer 1

Exchanges with commercial substance &

Exchanges without commercial substance.

Question 2

Can an exchange between companies without boot (cash) still be an exchange of commercial substance?

Answer 2

Yes.

Question 3

Nonmonetary exchanges under IRS:

Answer 3

1. Exchanges with dissimilar assets - record full gains.
2. Exchanges wish similar assets - do not recognize gains.

Question 4

Losses are full recognized!

Answer 4

JE:

Dr. Machine B (Plub)

Dr. Loss on exchange (FV old - bk old= -Neg#)

Cr. Machine A’s book value

Question 5

Treat as monetary exchanges:

Answer 5

1. “Regular” Monetary transactions with commercial substance.
2. Nonmonetary transactions with commercial substance.
3. Nonmonetary transactions without commercial substance, WITH BOOT RECEIVED IS MORE THAN 25% OF TOTAL FV GIVEN.
4. Nonmonetary transactions without commercial substance, BOOT PAID IS MORE THAN 25% OF TOTAL FV GIVEN.

Question 6

Do not recognize any gains when:

Answer 6

1. No boot received = no gain.
2. Boot paid is less than 25% OF TOTAL FV GIVEN = NO GAIN.

JE:

Dr. Machine B (Bk old + insignificant boot)

Cr. Machine A (Bk old)

Cr. Cash (insignificant boot)

Question 7

Proportional Gain

Answer 7

When BOOT RECEIVED IS LESS THAN 25% OF TOTAL FV GIVEN, RECOGNIZE PROPORTIONAL GAIN.

JE

Dr. Machine B (plug)

Dr. Cash

Cr. Machine A (bk old)

Cr. Proportional Gain (Take the % of boot received of total FV given that is less than 25% and multiply by (FV old - Bk old)

Question 8

Monetary Exchange JE

Answer 8

Dr. Machine B (FV or FV of asset given up plus cash if FV of machine b is not known)

Dr. Accum Depreciation on old asset..machine A

Dr. Cash received

Dr. Loss

Cr. Gain (FV old - bk old), cash not included here

Cr. Cash given

Cr. Historical Cost of machine A