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

Determining Market ValueDetermining Market Value

13-4

$52,000 Cost

$17,000 – Accumulated Depreciation

$35,000 = Book Value

$40,000 Market Value

Determining Market ValueDetermining Market Value

13-5

Sales Price – Book Value = Gain (Loss)

$52,000 Cost

$17,000 – Accumulated Depreciation

$35,000 = Book Value

$40,000 Market Value

Determining Market ValueDetermining Market Value

13-6

Sales Price – Book Value = Gain (Loss)

Loss—Recognize entire loss, no exceptions.

$52,000 Cost

$17,000 – Accumulated Depreciation

$35,000 = Book Value

$40,000 Market Value

Determining Market ValueDetermining Market Value

13-7

Loss—Recognize entire loss, no exceptions.

Gain—Can any of the gain be deferred?

Determining Market ValueDetermining Market Value

$52,000 Cost

$17,000 – Accumulated Depreciation

$35,000 = Book Value

$40,000 Market Value

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

Exchange of Similar AssetsExchange of Similar Assets

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

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

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

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.

Exchange of Similar AssetsExchange of Similar Assets

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

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

13-13

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

13-14

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

Question: Are the assets similar?

Answer: No, therefore recognize entire gain.

Question: Is there any gain?

Answer: Yes, but how much?

List price Market Value

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2

13-15

Question: Are the assets similar?

Answer: No, therefore recognize entire gain.

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).

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

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13-16

$52,000 Cost

$17,000 – Accumulated Depreciation

$35,000 = Book Value

$40,000 Market Value

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

Sales Price — Book Value = Gain (Loss).

$40,000 — $35,000 = $5,000

13-17

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

Truck (new)………………………………….. 40,000

Steps for exchange of dissimilar assets

Record the new truck at FMV.1

13-18

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

Truck (new)………………………………….. 40,000

Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000

Steps for exchange of dissimilar assets

Record the new truck at FMV.

Remove all items related to the old machine.

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2

13-19

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

Truck (new)………………………………….. 40,000

Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000

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

Steps for exchange of dissimilar assets

Record the new truck at FMV.

Remove all items related to the old machine.

Record any gain or loss.

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13-20

Truck (new)………………………………….. 40,000

Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000

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

Steps for exchange of dissimilar assets

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

Record the new truck at FMV.

Remove all items related to the old machine.

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

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

Textp. 761

13-23

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

13-24

Textp. 761

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

13-25

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

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.

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

13-27

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

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

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

Machine (new)………………………………. 35,000

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.

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

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2

13-29

Machine (new)………………………………. 35,000

Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000

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

Steps for exchange of similar assets—no cash

Remove all items related to the old machine.

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

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).

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

13-32

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).

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

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

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

13-33

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

Textp. 761

13-34

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

13-35

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

13-36

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

13-37

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

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.

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

13-38

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

Machine (new)………………………………. 55,000

Record the new machine at FMV.

Steps for exchange ofdissimilar assets—Cash > 25%

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13-39

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

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

Machinery (old)……………………………. 52,000

Record the new machine at FMV.

Remove all items related to the old machine.

Steps for exchange ofdissimilar assets—Cash > 25%

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13-40

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

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

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

Record the new machine at FMV.

Remove all items related to the old machine.

Record cash paid.

Steps for exchange ofdissimilar assets—Cash > 25%

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2

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13-41

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

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

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

Record the new machine at FMV.

Remove all items related to the old machine.

Record cash paid.

Record entire gain.

Steps for exchange ofdissimilar assets—Cash > 25%

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2

3

4

13-42

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

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

Record the new machine at FMV.

Remove all items related to the old machine.

Record cash paid.

Record entire gain.

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

Steps for exchange ofdissimilar assets—Cash > 25%

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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

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.

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

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

13-46

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

Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000

Steps for exchange ofsimilar assets—cash paid < 25%

Remove all items related to the old machine.1

13-47

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

Machine (new)………………………………. 38,000

Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000

Cash………………………………………… 3,000

Steps for exchange ofsimilar assets—cash paid < 25%

Remove all items related to the old machine.

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

Accumulated Depreciation—Machinery….. 17,000

Machinery (old)……………………………. 52,000

Cash………………………………………… 3,000

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

Steps for exchange ofsimilar assets—cash paid < 25%

Remove all items related to the old machine.

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

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.

The portion of the gain to be recognized is:

Cash ReceivedCash Received + FMV of New Asset

CashReceived

RecognizedGain

= x

13-51

Textp. 761

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

13-52

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

$52,000 Cost

$42,000 – Accumulated Depreciation

? = Book Value

$43,000 Market Value

13-53

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

$52,000 Cost

$42,000 – Accumulated Depreciation

$13,000 = Book Value

$43,000 Market Value

13-54

Sales Price (FMV) – Book Value = Gain

$43,000 – $13,000 = $30,000

Recognize some of the indicated Gain

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

$52,000 Cost

$42,000 – Accumulated Depreciation

$13,000 = Book Value

$43,000 Market Value

13-55

Recognize some of the indicated Gain

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

Cash ReceivedCash Received + FMV of New Asset

CashReceived

RecognizedGain

= x

13-56

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

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

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

Recognize some of the indicated Gain

Cash ReceivedCash Received + FMV of New Asset

CashReceived

RecognizedGain

= x

13-57

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

$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

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

Accumulated Depreciation—Machinery….. 42,000

Machinery (old)……………………………. 55,000

Remove all items related to the old machine.

Steps for exchange ofsimilar assets—cash received < 25%

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13-59

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

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

Machinery (old)……………………………. 55,000

Remove all items related to the old machine.

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

Steps for exchange ofsimilar assets—cash received < 25%

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13-60

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

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

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

Remove all items related to the old machine.

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

Record the cash received and the portion of the gain.

Steps for exchange ofsimilar assets—cash received < 25%

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13-61

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

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

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

Remove all items related to the old machine.

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

Record the cash received and the portion of the gain.

Steps for exchange ofsimilar assets—cash received < 25%

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13-62

End of ProblemEnd of Problem