13-1 asset retirements involving exchanges chapter 13 illustrated solution: exercise 13-27

13-1

Asset RetirementsInvolving Exchanges

Chapter 13Illustrated Solution: Exercise 13-27Illustrated Solution: Exercise 13-27

13-2

Determining Market ValueDetermining Market Value

Cost

– Accumulated Depreciation

= Book Value

Market Value

13-3

$52,000 Cost

? – Accumulated Depreciation

$35,000 = Book Value

$40,000 Market Value


13-4

$52,000 Cost

$17,000 – Accumulated Depreciation




13-5

Sales Price – Book Value = Gain (Loss)

$52,000 Cost





13-6

Sales Price – Book Value = Gain (Loss)

Loss—Recognize entire loss, no exceptions.

$52,000 Cost





13-7

Loss—Recognize entire loss, no exceptions.

Gain—Can any of the gain be deferred?


$52,000 Cost




13-8

Exchange of Similar AssetsExchange of Similar Assets

Theory: When exchanging similar assets, there may not be a culmination of the earnings process.

13-9



If Market Value > Book Value, then accumulated depreciation to date exceeds the decline in market value to

date. However, if the company uses the asset until the end of the useful life, this difference may no longer exist. That is, at the end of the useful life, book value may equal

market value which would result in a gain of zero on disposal.

13-10


If Market Value > Book Value, then accumulated depreciation to date exceeds the decline in market value to

date. However, if the company uses the asset until the end of the useful life, this difference may no longer exist. That is, at the end of the useful life, book value may equal

market value which would result in a gain of zero on disposal.

In some cases, an exchange of similar assets is treated as if the new asset is a continuation of the original asset. And, the gain (or part of the gain) as of the transaction date may be deferred until the new asset is retired.


13-11

Part (a)—Dissimilar AssetsPart (a)—Dissimilar Assets

Question: Are the assets similar?

Answer: No, therefore recognize entire gain.

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13-12

Textp. 761

Recognition of Gain on Exchange of AssetsRecognition of Gain on Exchange of Assets

13-13

Textp. 761


13-14




Question: Is there any gain?

Answer: Yes, but how much?

List price Market Value

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13-15



Question: Is there any gain?

Answer: Yes, but how much?

List price Market Value

Since the Market Value of the old machine was stated as $40,000, we assume the market value of the new truck is also $40,000 (arm’s-length transaction).


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13-16

$52,000 Cost





Sales Price — Book Value = Gain (Loss).

$40,000 — $35,000 = $5,000

13-17


Truck (new)………………………………….. 40,000

Steps for exchange of dissimilar assets

Record the new truck at FMV.1

13-18


Truck (new)………………………………….. 40,000

Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000


Record the new truck at FMV.

Remove all items related to the old machine.

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13-19


Truck (new)………………………………….. 40,000


Machinery (old)……………………………. 52,000

Gain on Exchange of Machinery………… 5,000




Record any gain or loss.

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13-20

Truck (new)………………………………….. 40,000


Machinery (old)……………………………. 52,000

Gain on Exchange of Machinery………… 5,000





Record any gain or loss.

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13-21

Part (b)—Similar Assets, No CashPart (b)—Similar Assets, No Cash

When similar assets are exchanged without any cash involved, the new asset is recorded at the book value of the old asset. This effectively defers all gains.

13-22


Textp. 761

13-23

Textp. 761


13-24

Textp. 761


13-25

Textp. 761


13-26

When similar assets are exchanged without any cash involved, the new asset is recorded at the book value of the old asset. This effectively defers all gains.

Since all gains are deferred, any difference between list price and market value becomes moot.


13-27


Accumulated Depreciation—Machinery…..17,000

Machinery (old)…………………………….52,000

Steps for exchange of similar assets—no cash

Remove all items related to the old machine.1

13-28


Machine (new)………………………………. 35,000


Machinery (old)……………………………. 52,000



Record the new machine at the value of the old machine.

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13-29

Machine (new)………………………………. 35,000


Machinery (old)……………………………. 52,000




Record the new machine at the value of the old machine.

There will be no gain or loss.

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13-30

Part (c)—Similar Assets, Cash > 25%Part (c)—Similar Assets, Cash > 25%

When similar assets are exchanged and cash involved exceeds 25% of the FMV of the exchange, the new asset is recorded at FMV of the exchange. All gains are entirely recognized (monetary transaction).

13-31



FMV of New Asset = FMV of Old Asset + Cash Paid

13-32



* FMV can be determined by either side of the equation, whichever is most easily (reliably) determinable.


13-33


Textp. 761

13-34

Textp. 761


13-35

Textp. 761


13-36

Textp. 761


13-37


Remember this old machine has a book value of $35,000 and a market value of $40,000. Therefore, in a monetary transaction, Coaltown Corp. will realize a $5,000 gain.

In this problem, Coaltown will record the new machine at FMV,which is equal to the FMV of the old machine plus the $15,000 paid.


13-38


Machine (new)………………………………. 55,000

Record the new machine at FMV.

Steps for exchange ofdissimilar assets—Cash > 25%

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13-39


Machine (new)………………………………. 55,000Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000




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13-40



Machinery (old)……………………………. 52,000Cash…………………………………………15,000



Record cash paid.


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13-41



Machinery (old)……………………………. 52,000Cash…………………………………………15,000Gain on exchange of machinery…………. 5,000



Record cash paid.

Record entire gain.


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13-42


Machinery (old)……………………………. 52,000Cash…………………………………………15,000Gain on exchange of machinery…………. 5,000



Record cash paid.

Record entire gain.



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13-43

Part (d)—Similar Assets, Cash Paid < 25%Part (d)—Similar Assets, Cash Paid < 25%

When similar assets are exchanged, and cash of less than 25% is paid, the new asset is recorded at the book value of the old asset plus the cash paid. This effectively defers all gains.

13-44


When similar assets are exchanged, and cash of less than 25% is paid, the new asset is recorded at the book value of the old asset plus the cash paid. This effectively defers all gains.

Since all gains are deferred, any difference between FMV of the new and FMV of the old (plus the cash paid) is ignored.

13-45

Textp. 761


13-46



Machinery (old)……………………………. 52,000

Steps for exchange ofsimilar assets—cash paid < 25%

Remove all items related to the old machine.1

13-47


Machine (new)………………………………. 38,000


Machinery (old)……………………………. 52,000

Cash………………………………………… 3,000



Record the new machine at the book value of the old machine plus cash paid.

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13-48

Machine (new)………………………………. 38,000


Machinery (old)……………………………. 52,000

Cash………………………………………… 3,000




Record the new machine at the book value of the old machine plus cash paid.

There will be no gain or loss.

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13-49

Part (d)—Similar Assets, Cash Received < 25%Part (d)—Similar Assets, Cash Received < 25%

When similar assets are exchanged, and cash of less than 25% is received, the new asset is recorded at the book value of the old asset, less the cash received, plus a portion of the gain.

13-50


When similar assets are exchanged, and cash of less than 25% is received, the new asset is recorded at the book value of the old asset, less the cash received, plus a portion of the gain.

The portion of the gain to be recognized is:

Cash ReceivedCash Received + FMV of New Asset

CashReceived

RecognizedGain

= x

13-51

Textp. 761


13-52


$52,000 Cost


? = Book Value


13-53


$52,000 Cost




13-54

Sales Price (FMV) – Book Value = Gain

$43,000 – $13,000 = $30,000

Recognize some of the indicated Gain


$52,000 Cost




13-55




CashReceived

RecognizedGain

= x

13-56

$3,000 $3,000 + $40,000

x $30,000 = $2,093Recognized gain:




CashReceived

RecognizedGain

= x

13-57


$13,000 Book Value of Old Machine

$ 3,000 – Cash Received

$ 2,093 + Portion of Gain Recognized

$12,093 = Book Value of New Machine

13-58



Machinery (old)……………………………. 55,000


Steps for exchange ofsimilar assets—cash received < 25%

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13-59


Machinery (new).…………………………….12,093Accumulated Depreciation—Machinery….. 42,000

Machinery (old)……………………………. 55,000


Record the new machine at the book value of the old machine less the cash received, plus a portion of the gain.


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13-60


Machinery (new).…………………………….12,093Accumulated Depreciation—Machinery….. 42,000Cash………………………………………….. 3,000

Machinery (old)……………………………. 55,000Gain on exchange of machinery…………. 2,093



Record the cash received and the portion of the gain.


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13-61


Machinery (new).…………………………….12,093Accumulated Depreciation—Machinery….. 42,000Cash………………………………………….. 3,000

Machinery (old)……………………………. 55,000Gain on exchange of machinery…………. 2,093



Record the cash received and the portion of the gain.


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13-62

End of ProblemEnd of Problem

13-1 asset retirements involving exchanges chapter 13 illustrated solution: exercise 13-27

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