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Subject Topic: Non Monetary Exchange (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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Payal123
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Posted: 24 Jun 2009 at 17:53 | IP Logged  

Can anyone please solve my following doubts on Non Monetary Exchange that has Commercial Substance:

1) The book says that for calculating gain/loss, Cash given up is not considered. what if cash is received?
  I am assuming if cash given up is not considered then cash received is also not considered. Can any1 please confirm this.

2) Basis of new asset acquired =
Fair value of Asset given up
Add: Cash paid
Less: Cash received
Is this correct?

3) If problem is silent about commercial substance what should we assume? does it mean the transaction has commercial substance or lacks commercial substance?



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Payal123
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Posted: 24 Jun 2009 at 23:23 | IP Logged  

I havent got any reply on this too.

Please any1 ???????????????


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winsouza
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Posted: 24 Jun 2009 at 23:53 | IP Logged  

Payal123, below are my responses:

1. It seems like cash given up is taken into consideration for calculating the acquired assets basis and not during calcuation of gain/loss hence i guess you are right that even cash received is also not taken into consideration. While calculating Gain/loss you only take Fair value and book value of the asset given up. The cash received will come into play for calculating the Gain/loss when the transaction lacks commercial substanace

2. The Basis of new asset acquired for an exchange having commercial substance is correct.

3. Thats a very good question and got me thinking too, will ask my instructor over the weekend but i think it will be tough on us if they don't tell us whether the transaction has commercial transaction or not has we could use 2 different method to get to the answer and i do remember my prep profs telling us that they would disclose what kind of transaction it is.

Hope that was helpful.



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Payal123
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Posted: 25 Jun 2009 at 00:11 | IP Logged  

hi winsouza,

while solving some Becker MCQs i realized there were few qs that did not tell whether it has commercial substance or lacks commercial substance. so i was just wondering if thers some logic behind this or how do we know.
Anyways i'll research on this & you too lemme know if you could find it from your lecturer.

And ya thanx a ton for answering. Really really appreciate it.
Also it would be great if you could try solving my another query on Non Monetary Exchange.

Thanks once again & Good Luck


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to_be_cpa
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Posted: 25 Jun 2009 at 10:29 | IP Logged  

It’s given in the Becker pass master questions; "similar" and "dissimilar" asset wording is obsolete and should not be used in the future. Use of “similar” and “dissimilar” was valid till late 2004 until SFAS 153 on exchange of non-monetary assets was issued.

But who knows?

 

Dissimilar exchanges – having commercial substance:-

 

A dissimilar exchange, involves the exchange of one asset for another asset that performs a different function. Trading in an old truck for machinery is an example of a dissimilar exchange.

 

As a result of this exchange, future cash flows are expected to change significantly.

 

Similar exchanges – lacking commercial substance:-

 

A similar exchange involves the exchange of one asset for another asset that performs the same type of function. Trading in an old delivery truck to purchase a new delivery truck is an example of a similar exchange.

 

Future cash flows would not be impacted significantly in such type of exchanges.

 

Dissimilar exchanges – having commercial substance

 

Steps - accounting treatment:-

 

1.      Recognize gain/loss

 

      Gain/Loss = FV of the asset given up – BV of the asset given up

 

2.      Record the asset received at the basis calculated as below:-

      Record the new asset received at FV of the asset received or at the FV of the assets given up plus cash paid, whichever is more evident.

 

3.      Journal entry :-

      DR New asset (FV as calculated above)

      DR Accumulated Depreciation of the asset given up

      DR Cash received

      DR Loss (if any, as calculated above)

      CR        Old asset at historical cost

      CR       Cash paid

      CR        Gain (if any, as calculated above)

 

Similar exchanges – lacking commercial substance:-

Steps:-

1.      Recognize gain/loss

      Gain/Loss = FV of the asset given – BV of the asset given

i.)                    Boot is paid = No Gain

ii.)                   No Boot received = No Gain

iii.)                 Boot received = Recognize gain

n        If boot >25% of the total consideration (including boot received), recognize all gain

n        If boot <25% of the total consideration (including boot received), recognize gain proportionately:-

                Gain * Total boot received

                                                            Total consideration received

iv.)                 Losses = Always recognize in full

2.      Record the asset received at the basis calculated as below:-

      It would depend upon the gain/loss being recognized, cash paid/received.

 

Hope this helps payal....

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