[Anonymous]

The answer says you recognize a gain because there is commercial substance because cash flows are significantly different. There is only a 15,000 difference out of an exchange of 50,000 for the new van and 30,000 for old van plus 5000 cash. This s a like kind exchange and the difference isn’t that much so I don’t think there are “significantly different cash flows.” Isn’t “significantly different cash flows” just arbitrary and open to interpretation?

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Dahl Co. traded a delivery van and $5,000 cash for a newer van owned by West Corp. The following information relates to the values of the vans on the exchange date:

Carrying Value Fair Value

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Old van $30,000 $45,000

New van 40,000 50,000

Dahl’s income tax rate is 30%. What amounts should Dahl report as gain on exchange of the vans?

A. $0

B. $1,000

C. $700

D. $15,000

FASB ASC 845-10-30-1 specifies that the accounting for nonmonetary exchanges generally should be accounted based on fair values, which is the same basis as that used for monetary transactions. FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:

Fair value is not determinable.

Exchange transaction is to facilitate sales for customers.

Exchange transaction lacks commercial substance.

In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity’s future cash flows. FASB ASC 845-10-30-4 specifies that the entity’s future cash flows are expected to change significantly if either of the following criteria is met:

The configuration (risk, timing and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred.

The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged.

In Dahl’s case, criterion (1) is met because the configuration of the future cash flows associated with the asset received (a new van) differs significantly from the future cash flows of the asset surrendered (the old van and cash). Therefore, the exchange has commercial substance and must be accounted for based on fair value. Dahl should record the new van at the $50,000 fair value of the assets surrendered ($5,000 cash × $45,000 fair value of old van). The $15,000 difference between the $30,000 carrying amount of the old van and its fair value of $45,000 should be recognized as a gain. The entry is:

Dr Van (new) $50,000

Cr Van (old) $30,000

Cr Cash 5,000

Cr Gain 15,000