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Subject Topic: Question regarding boot (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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Megan
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Posted: 16 Sep 2009 at 15:07 | IP Logged  

Slad Co. exchanged similar productive assets with Gil Co. and, in addition, paid Gil cash of $100,000.  The following information pertains to this exchange

Relinquished by Gil- Carrying Amount $75000; FV $140000

Relinquished by Slad- Carrying Amount $40000; FV $40000    

If the transaction lacks commercial substance, on Slad's books, the assets acquired should be recorded at what amount?

My question is: This exchange should be recorded as an exchange with commercial substance since the boot is more than 25% of the fair value of the exchange ($100000/$100000+$40000). But Wiley treats this as an exchange lacking commercial substance. I am confused. Can someone please explain?

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bird
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Posted: 16 Sep 2009 at 16:34 | IP Logged  

Since the companies are exchanging "similar" productive assets, there is no commercial substance.

In regards to cpa questions, the use of "similar asset" terminology usually implies that the exchange lacks commercial substance. Becker advised not to expect it on the actual exam, but if it arises, treat all exchanges of similar assets as lacking commerical substance.

Also, regardless of whether boot is involved or not, an exchange lacking commercial substance will always lack commercial substance. Boot received simply creates an exception where gain can be recognized, despite the noncommercial substance classification. The involvement of boot does not change the "substance" of the transaction, it just dictates the recognition of gains.

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Megan
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Posted: 16 Sep 2009 at 16:39 | IP Logged  

Thanks Bird..

Just so that I understand it correctly, what you mean to say is that if the question specifically states that the exchange lacks commercial substance, we have to treat it that way only even if boot>25% of the exchange.

And so for the company receiving the boot, we should recognise only partial gain instead of entire gain.

Am I correct?

 

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bird
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Posted: 16 Sep 2009 at 16:45 | IP Logged  

when an exchange lacks commercial substance, typically NO gains are recognized. There are exceptions to the gain recognition rule (not the actual classification of the transaction).

I'm not sure of the %'s, but I know that depending on the amount of boot in relation to overall consideration received, a portion of the gain, or entire gain will be recognized.

I think in your above post you are correct.

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Xalina
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Posted: 24 Sep 2009 at 17:30 | IP Logged  

So Exchange of Dissimilar assets would mean that the exchange has commercial substance right?
Just want to be 100% sure on that!!


In an exchange of dissimilar assets, Transit Co. received equipment with a fair value equal to the carrying amount of other assets given up.  Transit also contributed cash.  As a result of the exchange, Transit recognized:
Ans: Loss equal to the cash given up.



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