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Beef_or_Chicken
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Joined: 13 Dec 2010
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Posts: 12

Posted: 11 Apr 2011 at 22:15 \| IP Logged

Loss, boot given: transaction has commercial substance

Situation #1

XYZ Co. trades a machine for land and $500 in cash

FV of machine: $6,000

Cost of machine: $10,000

Accumulated depreciation on machine: $3,000

BV of machine: $7,000

Land: FV unknown

Journal entry: Situation #1

[Dr] Land $6,500

[Dr] Accumulated Depreciation $3,000

[Dr] Loss $1,000

[Cr] Machine $10,000

[Cr] Cash $500

Situation #2

Assume the FV of the machine is unknown, but the land received was known to be $6,000.

Journal entry: Situation #2

[Dr] Land $6,000

[Dr] Accumulated Depreciation $3,000

[Dr] Loss $1,500

[Cr] Machine $10,000

[Cr] Cash $500

Please tell me why the $500 money consideration (boot) is used differently in the 2 situations outlined above. Need clarification on this. Thanks.

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lynxcat
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Joined: 10 May 2010
Location: United States
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Posts: 84

Posted: 12 Apr 2011 at 01:52 \| IP Logged

In situation 1, the amount of the loss is calculated based on the difference
between the machines FV and its BV, which gives you the $1,000 Loss. These
numbers are defined. Because the FV of the land is unknown, that number is
calculated by solely balancing the accounting equation.

In situation 2, the land FV is known, so the loss account is used to balance
the transaction.

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TaxProfMom
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Joined: 19 Mar 2010
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Posts: 112

Posted: 14 Apr 2011 at 14:15 \| IP Logged

Boot only counts if you are receiving it, not giving it. If you have a loss,
it's always recognized. If you have a gain, and get boot (and it doesn't
have commercial substance), you can only recognize a portion of the gain.
You recognize the gain * boot/total consideration rec'd. The remainder
gets subtracted from the FMV of the asset received so that it is "built-in"
gain.

Another way of looking at it is if you do the J/Es, the value of the new
asset is squeezed by the removal of the old asset & A/D, the receipt of
boot, and the recognition of part of the gain.

In the second example, you couldn't calculate the loss because you don't
know the FMV of the equipment, just BV. So you have to "squeeze" the
loss rather than squeeze the FMV of the asset received (land). The boot
given is just a distractor. Yes, it's in the J/E's, but it doesn't impact the
recognition of loss.

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