[jessanqi]

Hi,

I’m wondering, if no mention there are three exceptions exist to Fair Value treatment, the question said there is boot given, should I use book method intend?

If there is boot involved, then use book method instead of fair value method and don’t recognize gain right?

Please confirm!

Thank you!

On December 30, 20X5, Diamond Company traded in an old machine with a book value of $10,000 for a similar machine having a list price of $32,000, and paid a cash difference of $19,000. Diamond should record the new machine at

A. $32,000
B. $29,000
C. $22,000
D. $19,000

Explanation
The correct answer is B. The basic principle in accounting for non-monetary transactions is to record as the cost of an acquired asset the fair value of the asset surrendered to obtain it. An exception to this rule is specified when exchanges between similar assets are involved, because the “earnings process” of the surrendered asset is deemed not to have been completed, but passes along to the new asset acquired. In this situation (as in our case), recorded amounts (book value) are to be used for accounting entries. When monetary consideration is also paid, the payor of the monetary consideration (Diamond) would record as the cost of the new asset acquired the sum of the book value of the asset surrendered plus the amount of monetary consideration paid. In this case, since the book value of the old machine was $10,000, and Diamond paid a $19,000 cash difference, the recorded cost of the new machine would be $29,000. The journal entry to record this transaction is:
Debit: Asset received (plug) $29,000
Credit: Asset given up
(BV) $10,000
Credit: Cash
$19,000

[Mike J]

I am unsure if the question says there IS commercial substance.

Admittedly, I did not understand the given explanation.

Assuming there is, you go with what is more readily available–FV of what is given up (POV of who Diamond traded with) OR FV of what is given up (POV of Diamond).

I don't believe the list price alone is the fair value of what is received. Presumably, one would have to check it against the Tiers I (identical transactions), II (similar transactions), III (undiscounted cashflows) inputs. Please correct me, forum, if I have that wrong.

So you go with the Fair Value of what is sacrificed. That is the sum of the FV of the old asset + the cash paid. In this case, 29,000.

[jessanqi]

hi @Mike030882,

Thanks for the response.

Based on my understanding, the Fair value of the asset given = the fair value of asset received – boot paid. which equals to $32000-19000=13000.

FV of asset give (13000) – book value of asset given (10,000)=3000 gain.

I'm not sure if we should recognize the 3000 gain, since the question didn't mention if there is commercial substance. if lack commercial substance, we don't recognize gain. but if not lack, we should use Fair value method instead of book method, then we need to recognize gain.

Please confirm is this is correct??????

Thank you for the help!!!!

[Mike J]

That isn't quite right re non-commercial substance.

Recognize no gain when: FV new asset > cash PAID + old asset

Recognize gain when: FV new asset > cash REC'D + old asset.

In the latter case, gain calc is as follows:

New Asset FV
+ Cash rec'd
= Total Consid rec'd
<Old Asset BV>
=Total Gain

Gain recog =
Total Gain x (Cash rec'd / Total Consid)

…

“I'm not sure if we should recognize the 3000 gain, since the question didn't mention if there is commercial substance. if lack commercial substance, we don't recognize gain. but if not lack, we should use Fair value method instead of book method, then we need to recognize gain.”

I believe there is considered comercial substance, given that I arrived at the 29,000 answer the testmaker arrived at.

[jessanqi]

Thanks @Mike030882!

[Skynet]

I exchanged nonmonetary assets by exchanging one girlfriend for an even Hotter girlfriend.

The exgirlfriend gave be the “Boot” and it wasn't pretty.

[Mike J]

@skynet, it seems like your ex may have received a gain from her involuntary conversion.

You're welcome @jessanqi. I hope I was helpful.

[Author]

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