[Kelvinb]

How do you deal with questions that are misleading.

Example: Gain or loss of nonmonetary exchange.

Questions asked for gain or loss with the following facts:

Old delivery van exchanged for a new delivery van. Old van CV-30k FV 45k New van CV 40k FV 50k

Company gave $5000 cash with the deal.

The question hinges on if the cash flows are significantly different. The answer indicates that the cash flows are significantly different therefore you recognize 15k gain.

My problem is how can we determine that with the limited information. It does not make sense that a new delivery van can deliver more products simply because it is new. The new van cannot drive any faster than the old van. Someone please explain.

[Heather1032]

Could you post the exact wording of the question? Usually the question will state if the exchange had commercial substance or if it lacked commercial substance. If you post the exact wording I can be of more help. In general if the exchange has commercial substance then the gain is recognized. The gain is calculated by subtracting the BV of the asset given up from the FV of the asset given up. Hopefully this is helpful.

[Anonymous]

Like Heather said, usually misleading questions hinge on something very specific in the wording. If you post the full question word-for-word, all the answer options, and the correct answer, then someone should be able to help explain how you know what the answer is.

[Missy]

https://www.another71.com/cpa-exam-forum/topic.php?id=commercial-substance-1

I believe this is the entire question you are referring to. The reason you assume a new van would provide more future cash flows is because it has a longer expected useful life. Has to do with how long the asset will provide cash flow not whether it would increase cash flow in the same time period.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Kelvinb]

yes that is the question. My problem is they do not indicate the difference in age of the two vehicles, or the type of vehicles.
If the vehicle is newer, that means it could be 1 day newer and be a nicer equipped vehicle to account for the higher fair value.
I do not think that having questions with so much ambiguity is really testing our accounting ability at all. I think wording like this does nothing more than generate higher testing revenues for themselves. How many 74's happen through this process.

There now we have the elephant in the room.

[Kelvinb]

Here is a question that could be confusing. On July 1, one of Rudd Co.’s delivery vans was destroyed in an accident. On that date, the van’s carrying amount was $2,500. On July 15, Rudd received and recorded a $700 invoice for a new engine installed in the van in May, and another $500 invoice for various repairs. In August, Rudd received $3,500 under its insurance policy on the van, which it plans to use to replace the van. What amount should Rudd report as gain (loss) on disposal of the van in its year-end income statement? Under the new regulations in 2014 the $500 in repairs might not qualify for an expense unless the safe harbor and deminus election was in place at the beginning of the year. Without the election the max is $200 per item. Without sufficient information in the wording of the question, the answer could be incorrect. two repairs at $250 would be required to be capitalized and causing a $200 loss instead of the $300 gain.

[Author]

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