[2B.CPA]

In Becker F2 – accounting for non-monetary exchanges question #13

In this question, a company exchanges land with appraised value of $50,000 and original cost of $20,000 for machinery with a fair value of $55,000. Assuming the transaction has commercial substance, what is the gain on the exchange?

My Answer: Since there is commercial substance, all gains should be recognized, and the gain amount should be

$55,000 (FV of asset received) – $20,000(BV of asset given up) = $35,000.

But Becker’s answer is $30,000. Their explanation is that gain is equal to difference between FV of asset given up and BV of asset given up.

How can this be? I even tried to think of the journal entry, but it wouldn’t balance if I used Becker’s answer, would it? The gain wold have to be 35,000 to make it balance. Please help! I can’t tell if this is an error or I’m missing something, thanks!

Machinery 55,000

Land 20,000

Gain 35,000

[Anonymous]

Wouldn't the machine just be recorded at 50? And sort of makes sense because if you think about basis equaling cost, you did give up something worth $50 for the machinery.

Imagine if there was a fire sale or something, or you just negotiated a really good deal and bought the machinery for 50 instead of 55. In cash. I think you would record it at 50 then.

IDK, that's my guess. I remember getting that question and getting it wrong too.

Edit: And taking that earlier analogy, basically what the answer is implying is:

1) You sold the land for cash at the land's FMV (50) resulting in a gain

2) You flipped around and bought the machinery at a discount with that cash.

[Anonymous]

It has been awhile since I've done FAR but the gain only relates to the asset you give up. It has nothing to do with the new asset.

[Anonymous]

Well if you just think about it common sense-wise, it'll be very easy to do F/S manipulation if you were allowed to record the machine at its FMV and recognize the entire gain.

IDK if revenue recognition applies, but:

Revenues are realized

–> when products are exchanged for cash or claims to cash.

Revenues are realizable

–> when related assets received are readily convertible

to cash or claims to cash.

So again, I say it's sort of weird to realize the gains on the machines for buying it at a discount.

[2B.CPA]

Oh so we are supposed to assume that the machinery was bought at a discount… I see… I did think it was weird that the FV of the asset given up didn't match the FV of the asset received in exchange, since it always did in other questions. It makes total sense now though. Thanks guys, now I can sleep in peace tonight!

[Anonymous]

I guess the bottom line is:

Basis = Cost = FMV of what you give up

Not the FMV of what the asset is. Hence why we have stuff like Goodwill when we buy stuff at a premium.

[Mehwish]

So in any case, use FV of asset given up, if that's not provided than use FV of asset received?

[Author]

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