exchange of nonmonetary assets

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


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


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


Case 1: Dissimilar 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





Acquired truck valued at FMV of Crane given up: $12,000Gain is recognized for difference between FMV of Crane

and BV of Crane





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



Journal entry:

Accum. Depr., Crane 40,000Crane 50,000

First, take the Crane off the books.



Journal entry:

Accum. Depr., Crane 40,000Crane 50,000Gain on Crane disposal 2,000

Then, record the gain on the transaction.



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).


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



• 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


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





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



Journal entry:

Accum. Depr., Old Car 10,000Old Car 20,000

First, remove the old car from the books.



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.



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).


Case 3: Similar Assets in a Gain Trade without cash receipt



The gain is deferred until the new asset is sold.



The gain is deferred until the new asset is sold.

New asset recorded at BV of asset(s) given up.


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






But this gain will be deferred since this is an

exchange of similar assets without cash receipt.

BV = $170,000





BV = $170,000

Note also that we will need to pay $15,000 cash to

make up for FMV shortfall.


Journal entry:

Accum. Depr., Old House 30,000Old House 200,000

First, remove the old house from the books.



Journal entry:

Accum. Depr., Old House 30,000Old House 200,000Cash 15,000

Next, record the cash disbursement.



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 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.



When cash is received, the transaction is considered part sale and part exchange. So, a partial gain must

be recognized.



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


Case 4: Similar Assets in a Gain Trade with cash receipt example




BV = $170,000

Note also that we will expect to receive $25,000 cash to make up for FMV

shortfall.





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.





BV = $170,000



First, compute recognized gain:






= $25,000

$225,000 + $25,000



x $80,000




= $25,000

$225,000 + $25,000



x $80,000

= $8,000



Journal entry:

Accum. Depr., Old House 30,000Old House 200,000

First, remove the old house from the books.



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.



Journal entry:

New House 153,000Cash 25,000Accum. Depr., Old House 30,000


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).



Journal entry:

New House 153,000Cash 25,000Accum. Depr., Old House 30,000


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).

exchange of nonmonetary assets

Documents

fmv of assets

fmv of crane

bv of assets

dissimilar assets asset

dissimilar assets examplecrane

gain trade

loss trade asset

loss trade examplecar