[Kls238]

Per Beckers book, if you pay cash and the exchange lacks commercial substance, no gain is recognized. The question below’s answer explanation states that you do recognize the gain even though cash is paid and the exchange lacks commercial substance. So which is correct: the book or the question?

On January 2, Elbert’s Delivery Company and Wanda’s Exporters exchanged similar delivery trucks in an exchange that lacks commercial substance. Data relative to the trucks follow:

Elbert’s truck

Original cost $10,000

Accumulated depreciation as of January 2 8,000

Fair market value 3,000

Wanda’s truck

Book value $15,000

In the exchange, Elbert paid Wanda cash of $10,000. Elbert’s Delivery Company should record the new truck at:

a. $8,000

b. $13,000

c. $10,000

d. $12,000

Becker says the answer is b, but shouldn’t it be d?

Passed all sections.

[JohnWayneIsGod]

Eh, I'm getting ‘D' too. Are we all missing something? From what I can tell, it would be B if the transaction had commercial substance but it would be D if it lacks commercial substance.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Lidis]

Hi,

The best way to solve this problem is with a JE

New Asset 13,000

Accum Deprec old asset 8,000

Old Asset 10,000

Cash 10,000

Gain 1,000

Old asset 10,000 – Accum depre 8,000 = 2,000

FMV 3,000 – 2,000 = 1,000 gain

[Kls238]

Beckers explanation is that both parties recognize a gain or loss because the cash involved is more than 25% of he total consideration given. Doesn't the 25% rule only apply when cash is received? I sent a question to Becker!

Passed all sections.

[Lidis]

Hi,

The best way to solve this problem is with a JE

DR New Asset 13,000

DR Accum Deprec old asset 8,000

CR Old Asset 10,000

CR Cash 10,000

CR Gain 1,000

Old asset 10,000 – Accum depre 8,000 = 2,000

FMV 3,000 – 2,000 = 1,000 gain

[JohnWayneIsGod]

Dude, let us know what Becker says. That 25% rule is something that keeps slipping my mind.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Kls238]

Revenue,

Thanks for the JEs. It helps for this question, but it doesn't help me with the concept. I thought no gain is recognized when you pay cash AND the exchange lack commercial substance, which is stated in the question. So either the question is incorrect or Beckers book is incorrect and there's a rule out there on this topic that Beckers book doesn't cover in which I'm hoping someone could help me out with/understand.

I'm retaking FAR so I'm trying to really understand the concepts. 🙁

Passed all sections.

[FAR_WARS]

From my becker notes:

Exchanges Lacking Commercial Subatance (U.S. GAAP)

Boot >= 25% of total consideration = Monetary exchange: Both parties to exchange recognize all gains and losses

FAR- 80
BEC- 75
AUD- 78
REG- ?

[JohnWayneIsGod]

Did some digging. There was a similar thread about this question last year. Looks like the 25% cash rule applies to both parties involved in the transaction.

https://www.another71.com/cpa-exam-forum/topic/far-question-about-exchanges-lacking-commercial-substance

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Kls238]

FAR_WARS & JohnWayneisGood,

Thanks, I went back and redid my notes and realized the book does state that! I honestly overlooked that. I saw “boot paid = no gain” and kept thinking all questions where the exchange was lacking commercial substance where cash is paid automatically meant that no gain is recognized. I guess that's why I'm retaking the exam. 🙁 But it's also little misleading initially by Becker if you ask me.

FAR_WARS – I love your user name, btw. I'm assuming its a play off of Star Wars. 🙂

Passed all sections.

[Author]

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