Nonmonetaty Transactions Flashcards
How is a gain/loss recognized when a a nonmonetary transaction has commercial substance?
When a nonmonetary transaction has commercial substance, gains and losses are recognized based on the difference between the fair value and the book value of the asset given up.
Boot received (<25% Rule)= Proportional Gain Recognized
Formula for recognized gain
Recognized gain = Realized x (boot received/FV received)
Boot received (>=25% Rule)= All Gain Recognized
Formula for recognized gain
100% of gain recognized
How is a monetary exchange with commercial substance accounted for?
If a non monetary exchange has commercial substance, the transaction is accounted for using the fair value of the asset surrendered or received, which ever is more evident.
What is the rule for gain and losses on fixed assets?
Gains and losses on fixed assets (including involuntary conversions) are always recognized during the period incurred based on recorded amount (NBV) plus costs associated with the transaction.
Rule : Gain or loss on sale of fixed assets (voluntary or involuntary)
gain or loss on the sale of a fixed asset (voluntary or involuntary) is recognized (Proceeds v carrying value) as part of continuing operations.
The carrying amount of the replacement property is equal to the FV or the consideration paid for it.
How to calculate the basis of exchanges that have commercial substance?
For exchanges that have commercial substance, the basis of the new machine is equal to the fair value of the old machine plus the cash paid.
On July 1, Year 1, DDC Co. exchanged a used crane for a new crane with ZN Corp. The used crane had a book value of $120,000 ($225,000 cost minus $105,000 accumulated depreciation) and a fair value of $125,000. The fair value of the new crane is $110,000. In addition to the exchange of the used crane, ZN paid DDC $15,000. The exchange lacks commercial substance.
For an exchange that lacks commercial substance, the cost of the new crane is a by-product of the cash received, the book value of the crane given up, and the gain on the transaction. The difference between the fair value and the book value of the old crane is $5,000 ($125,000 – $120,000). DDC received $15,000 in cash as a result of the transaction, with the fair value exchanged equal to $125,000 ($15,000 in cash + $110,000 for the new crane). $15,000 ÷ $125,000 = 12%. Multiplying $5,000 by 12% equals the recognized gain of $600.
The journal entry is as follows:
DR New crane 105,600 (plug)
DR Cash 15,000
CR Used crane 120,000
CR Gain 600
Recognizing gains and losses on exchanges with commercial substance
Gain and losses are always recognized in exchanges with commercial substance.
The difference between the fair value and book value of the asset given up.
Exchanges without commercial substance
- No boot is received = no gain
- Boot is paid = No gain (<25 percent rule)
- Boot is received = Recognize proportional gain (<25 Percent Rule)
The ratio is (total boot received /the total consideration received)
- When boot received equals or exceeds 25 percent of the total consideration. gains and losses are recognized in entirety by both parties
If the transaction lacks commercial substance and a loss is indicated, the loss should be recognized.
How to calculate the basis of the acquired asset when the transaction lacks commercial substance and no boot is received.
The basis of the acquired asset is equal to the basis of the old asset which is the asset’s fair value minus deferred gain
e.g. Machine A - FV=$12,000
BV=$10,000
Machine B FV= $12,000
Machine A- Gain = $12,000 - $10,000 = $2,000 gain
Gain is not recognize because no boot is received.
Basis of acquired asset =$10,000
How to calculate recognized gain when boot received is (<25percent rule) = proportional gain recognized?
Recognized gain = Realized gain x (Boot received /FV received)
boot received is >=25 percent rule) = all gain recognized
boot received is >=25 percent rule) = all gain recognized
How to calculate basis of new property in exchanges with commercial substance.
The basis of the property acquired is equal to the fair value of the property given up (book value plus gain or minus loss) plus cash paid or minus cash received.
