exchange of nonmonetary assets
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Exchange of Nonmonetary Assets. Major exchange categories: Dissimilar assets Similar assets In a loss trade In a gain trade without cash receipt In a gain trade with cash receipt. Exchange of Nonmonetary Assets. Major exchange categories: Dissimilar assets Similar assets - PowerPoint PPT PresentationTRANSCRIPT
Exchange of Nonmonetary Assets
Major exchange categories:
• Dissimilar assets
• Similar assets
- In a loss trade
- In a gain trade without cash receipt
- In a gain trade with cash receipt
Exchange of Nonmonetary Assets
Major exchange categories:
• Dissimilar assets
• Similar assets
- In a loss trade
- In a gain trade without cash receipt
- In a gain trade with cash receipt
Similarity refers to use or function within the line of business activity
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets
• Asset acquired recorded at FMV of asset given up
• Gain or loss recorded at difference between FMV of asset given up and BV of asset given up
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets Example
Crane given up:Original cost $50,000Accum. Depr. $40,000FMV $12,000
Truck received:FMV $13,200
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets Example
Crane given up:Original cost $50,000Accum. Depr. $40,000FMV $12,000
Truck received:FMV $13,200
Acquired truck valued at FMV of Crane given up: $12,000
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets Example
Crane given up:Original cost $50,000Accum. Depr. $40,000FMV $12,000
Truck received:FMV $13,200
Acquired truck valued at FMV of Crane given up: $12,000Gain is recognized for difference between FMV of Crane
and BV of Crane
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets Example
Crane given up:Original cost $50,000Accum. Depr. $40,000FMV $12,000
Truck received:FMV $13,200
Acquired truck valued at FMV of Crane given up: $12,000Gain is recognized for difference between FMV of Crane
and BV of Crane
BV = $10,000
Gain = $12,000 – 10,000 = $2,000
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets Example
Journal entry:
Accum. Depr., Crane 40,000Crane 50,000
First, take the Crane off the books.
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets Example
Journal entry:
Accum. Depr., Crane 40,000Crane 50,000Gain on Crane disposal 2,000
Then, record the gain on the transaction.
Exchange of Nonmonetary Assets
Case 1: Dissimilar Assets Example
Journal entry:
Truck 12,000Accum. Depr., Crane 40,000
Crane 50,000Gain on Crane disposal 2,000
Finally, record the value of the new truck. Note that this is the FMV of the Crane given up (not FMV of the truck received).
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade
This will naturally occur when the fair market value of the asset given up is below its book value
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade
• Asset acquired recorded at FMV of asset(s) given up
• Loss recorded at difference between FMV of asset(s) given up and BV of asset(s) given up
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade Example
Car traded-in:Original cost $20,000Accum. Depr. $10,000FMV $9,000
Car received:FMV $13,000
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade Example
Car traded-in:Original cost $20,000Accum. Depr. $10,000FMV $9,000
Car received:FMV $13,000
Note that we expect a loss of $1,000
BV = $10,000
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade Example
Car traded-in:Original cost $20,000Accum. Depr. $10,000FMV $9,000
Car received:FMV $13,000
Note also that the dealer will expect us to pay
$4,000 cash to make up for FMV shortfall. (He is only
willing to give us FMV credit for our trade-in).
BV = $10,000
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade Example
Journal entry:
Accum. Depr., Old Car 10,000Old Car 20,000
First, remove the old car from the books.
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade Example
Journal entry:
Loss on disposal, Old Car 1,000Accum. Depr., Old Car 10,000
Old Car 20,000Cash 4,000
Second, record the cash disbursement and the loss on disposal.
Exchange of Nonmonetary Assets
Case 2: Similar Assets in a Loss Trade Example
Journal entry:
New Car 13,000Loss on disposal, Old Car 1,000Accum. Depr., Old Car 10,000
Old Car 20,000Cash 4,000
Finally, record the new car. Notice that the value ends up being the equivalent to FMV of car given up ($9,000) + FMV of cash given up ($4,000).
Exchange of Nonmonetary Assets
Case 3: Similar Assets in a Gain Trade without cash receipt
Exchange of Nonmonetary Assets
Case 3: Similar Assets in a Gain Trade without cash receipt
The gain is deferred until the new asset is sold.
Exchange of Nonmonetary Assets
Case 3: Similar Assets in a Gain Trade without cash receipt
The gain is deferred until the new asset is sold.
New asset recorded at BV of asset(s) given up.
Exchange of Nonmonetary Assets
Case 3: Similar Assets in a Gain Trade without cash receipt example
Exchange of Nonmonetary Assets
Case 3: Similar Assets in a Gain Trade without cash receipt example
House given up:Original cost $200,000Accum. Depr. $30,000FMV $250,000
House received:FMV $265,000
Note that we expect a gain of $80,000.
BV = $170,000
Exchange of Nonmonetary Assets
Case 3: Similar Assets in a Gain Trade without cash receipt example
House given up:Original cost $200,000Accum. Depr. $30,000FMV $250,000
House received:FMV $265,000
Note that we expect a gain of $80,000.
But this gain will be deferred since this is an
exchange of similar assets without cash receipt.
BV = $170,000
Exchange of Nonmonetary Assets
Case 3: Similar Assets in a Gain Trade without cash receipt example
House given up:Original cost $200,000Accum. Depr. $30,000FMV $250,000
House received:FMV $265,000
BV = $170,000
Note also that we will need to pay $15,000 cash to
make up for FMV shortfall.
Exchange of Nonmonetary Assets
Journal entry:
Accum. Depr., Old House 30,000Old House 200,000
First, remove the old house from the books.
Case 3: Similar Assets in a Gain Trade without cash receipt example
Exchange of Nonmonetary Assets
Journal entry:
Accum. Depr., Old House 30,000Old House 200,000Cash 15,000
Next, record the cash disbursement.
Case 3: Similar Assets in a Gain Trade without cash receipt example
Exchange of Nonmonetary Assets
Journal entry:
New House 185,000Accum. Depr., Old House 30,000
Old House 200,000Cash 15,000
Finally, record the value of the new house. Notice that this is equivalent to the book value of the old house ($170,000) + the
book value of the cash given up ($15,000). Also notice that there is no gain recorded.
Case 3: Similar Assets in a Gain Trade without cash receipt example
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt
Note that this is different than the prior case, when cash was given to make up for FMV shortfall.
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt
When cash is received, the transaction is considered part sale and part exchange. So, a partial gain must
be recognized.
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt
When cash is received, the transaction is considered part sale and part exchange. So, a partial gain must
be recognized.
Recognized gain = Cash Received
FMV asset(s) received + Cash Received x total gain
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
House given up:Original cost $200,000Accum. Depr. $30,000FMV $250,000
House received:FMV $225,000
Note that we expect a gain of $80,000.
BV = $170,000
Note also that we will expect to receive $25,000 cash to make up for FMV
shortfall.
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
House given up:Original cost $200,000Accum. Depr. $30,000FMV $250,000
House received:FMV $225,000
BV = $170,000
Note also that we will expect to receive $25,000 cash to make up for FMV shortfall. Therefore, some
portion of the $80,000 gain will be recognized. The
remainder will be deferred.
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
House given up:Original cost $200,000Accum. Depr. $30,000FMV $250,000
House received:FMV $225,000
BV = $170,000
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
First, compute recognized gain:
Recognized gain = Cash Received
FMV asset(s) received + Cash Received x total gain
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
First, compute recognized gain:
= $25,000
$225,000 + $25,000
Recognized gain = Cash Received
FMV asset(s) received + Cash Received x total gain
x $80,000
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
First, compute recognized gain:
= $25,000
$225,000 + $25,000
Recognized gain = Cash Received
FMV asset(s) received + Cash Received x total gain
x $80,000
= $8,000
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
Journal entry:
Accum. Depr., Old House 30,000Old House 200,000
First, remove the old house from the books.
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
Journal entry:
Cash 25,000Accum. Depr., Old House 30,000
Old House 200,000Gain on Exchange Transaction 8,000
Then, record the partial gain you just calculated for the transaction and the cash you received for the transaction.
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
Journal entry:
New House 153,000Cash 25,000Accum. Depr., Old House 30,000
Old House 200,000Gain on Exchange Transaction 8,000
Finally, record the new house. Note that the new house is valued at the book value of the house given up ($170,000) minus the cash
received ($25,000) plus the gain recognized ($8,000).
Exchange of Nonmonetary Assets
Case 4: Similar Assets in a Gain Trade with cash receipt example
Journal entry:
New House 153,000Cash 25,000Accum. Depr., Old House 30,000
Old House 200,000Gain on Exchange Transaction 8,000
Finally, record the new house. Note that the new house is valued at the book value of the house given up ($170,000) minus the cash received ($25,000) plus the gain recognized ($8,000). Another
way to look at it: the new house is valued at its FMV ($225,000) minus the gain deferred on the transaction ($72,000).