[Anonymous]

On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker’s tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld?

A. $0

B. $3,000

C. $10,000

D. $30,000

Feld should recognize $30,000 gain:

Value received ($100,000 value of

tow truck less $10,000) $90,000

Book value of delivery truck:

Cost $140,000

Accumulated depreciation 80,000 60,000

---

Gain $30,000

Terms

Exchange Gain/Loss

References

---

I understand the 30,000 gain but why do you recognize the gain when this is a truck for truck exchange?

[Rocky123]

Because it has commercial substance.

The tallest oak in the forest was once just a little nut that held its ground.

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[CPA soon]

Commercial Substance=Dissimilar=Non like-kind=Affects Cashflows

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Anonymous]

So since it has commercial substance, the gain is FV of new property minus CV of old property and cash paid. So how come in another question, the gain is FV of old property minus BV of old property?

---

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

A. $0

B. $5,000

C. $30,000

D. $35,000

Nonmonetary exchanges are generally recorded at fair value.

Value of property exchanged $50,000

Original cost 20,000

---

Gain on exchange $30,000

[Anonymous]

The gain is always FV of old asset – CV of old asset. In the first example it follows this model as such:

Estimated fair value of $90,000

CV – $60,000

Gain = $30,000

Delivery truck had an original cost of $140,000, accumulated depreciation of $80,000

[needhelpnow]

OK, so question..

..Had it been a “Like-Kind exchange” and, NO commercial substance, would the below calculations be accurate? (Please correct it where you find applicable.) Thank you!

Amount Realized =

+100K FMV of NEW

– 10K Boot Paid (Cash Paid)

=90K Amount Realized

Realized Gain =

+90K Amount Realized

-60K NBV of Old

=30K Realized Gain

Boot= Cash Received (0) + Liab Received (0) + Non-Link Kind Exchange (0) – Liab Assumed (0)

Therefore Boot = 0

Recognized Gain = LESSER of Realized Gain or Boot Received.

Which means, Recognized Gain = 0

Please correct me if I am wrong! Thank you!!

[needhelpnow]

I am trying to stick to the formula instead of just looking at the question and doing the calculations in my head…and in this case with commercial substance involved, how would I correctly use the formula? Please explain. Thank you!

[Rocky123]

I don't really understand this concept either. Forget bonds. THIS is my weakest area. For some reason, it just doesn't make sense to me. At all!

The tallest oak in the forest was once just a little nut that held its ground.

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Rocky123, CPA

[Anonymous]

Wait, wait, wait

Carrying value = 20

Appraised value = 50

Traded for asset with “fair value” =55

Why wouldn't it be 35 realized/recognized?

The problem says fair value. Why isn't that a better measure than appraised value? If the machinery has a fair value of 55, then whatever you traded for it at an arm's length transaction must have had a fair market value of 55 as well.

[Rocky123]

The tallest oak in the forest was once just a little nut that held its ground.

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Rocky123, CPA

[Anonymous]

I prefer to solve these questions by writing out the JE. In general, the JE for a nonmonetary exchange with commercial substance would be:

DR..New asset @ FV

DR..Accumulated depreciation of old asset

DR..Cash received, if any

DR..Loss, if any

CR…….Old asset @ original cost

CR…….Cash paid, if any

CR…….Gain, if any

For the delivery truck question, it would be:

DR..New truck…………………$100,000

DR..Accum. depr old truck..$ 80,000

CR…….Old truck……………………………..$140,000

CR…….Cash paid……………………………$ 10,000

CR…….Gain……………………………………$ 30,000

[Rocky123]

@Casy

Thanks for the tip. I'll work on the homework for this topic today and give this approach a shot.

Any insight for the ones that lack commerical substance?

The tallest oak in the forest was once just a little nut that held its ground.

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Rocky123, CPA

[Anonymous]

That is easier with journal entries. Good call Casey.

[Author]

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