exchange of nonmonetary assets major exchange categories: dissimilar assets similar assets - in a...

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).