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Subject Topic: F.A lack commercial substance (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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faisy
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Posted: 09 May 2012 at 02:02 | IP Logged  

Scott Co. exchanged similar nonmonetary assets with Dale Co. and no cash was exchanged. The carrying amount of the asset surrendered by Scott exceeded both the fair value of the asset received and Dale's carrying amount of that asset. Scott should:

A. Reconnize the difference between the carrying amount of the asset it surrendered and the fair value of the asset it surrendered as a loss.

B.Reconnize the difference between the carrying amount of the asset it surrendered and the fair value of the asset it received as a gain.

C.Reconnize the difference between the carrying amount of the asset it surrendered and the carrying amount of the asset it received as a loss.

D.Recognize no gain or loss

Choice "a" is correct. It appears, based on the information provided in the question, that this transaction is a nonmonetary exchange that lacks commercial substance. As such, it is an exception to the general rule of basing the measurement value of the exchange on fair value.

Why does the exchange appear to lack commercial substance? The assets are stated to be similar, which is often an indication that the risk, timing, or amount of the expected future cash flows from the assets received do not appear to differ significantly from the risk, timing, or amount of expected future cash flows from the assets transferred. In this question, the assets have a similar productive use, and no cash changes hands, so a conclusion that the exchange lacks commercial substance appears to be warranted.

Now that we know that the exchange does not have commercial substance, let's look at the transaction a little closer. In the question, no boot is received or paid. However, the carrying amount of the asset surrendered exceeds the fair value of the asset surrendered. That means a loss. The loss should have already been recognized as part of the impairment process, but since it was not, a loss would be recognized in the exchange transaction.

Choices "b", "c", and "d" are incorrect per the above explanation.

My query is, where in the question, the examiner is saying that the carrying amount of the asset surrendered exceeds the fair value of the asset surrendered.

Does it matter if Carrying Cost is greater than the F.V of the asset received. Shouldn't we measure the Gain/Loss on the assets surrendered.

Please i need someone help.

 



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nk1001
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Posted: 09 May 2012 at 15:38 | IP Logged  

Hi Faisy,

Correct me if I am wrong here. But as per my
understanding, CV of an asset given up is greater than
the FMV and CV of an asset received. Since the
question does not mention anything about the FMV of the
asset given up, we will assume it is equal to FMV of
asset received (as per ASC Topic 845)


Now that we know the CV and FMV of asset given up, let's
compare them. In this case FMV < CV so we can tell its a
loss.

At this point, I don't think I need to know whether the
transaction has commercial substance or not, in any case,
loss is always recognized for the difference between the
CV and FMV of the asset given up.
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faisy
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Posted: 09 May 2012 at 20:02 | IP Logged  

Thanks nk100

looks ok, i think you r right

 



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divyagovil1
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Posted: 14 May 2012 at 01:51 | IP Logged  

you can refer this link as well:

http://www.cpanet.com/cpa_forum/forum_posts.asp?
TID=21404&KW=Scott+Co%2E+exchanged+similar+nonmone&PN=0&TPN
=2

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faisy
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Posted: 15 May 2012 at 05:59 | IP Logged  

Thanks Divia

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