[LeBronJames]

For some reason this MC question is driving me crazy. I don’t think I have ever spent this long trying to figure out and understand a Becker MC question. Here is the question and explanation:

In an exchange of dissimilar assets under IFRS, an entity received equipment with a fair value equal to the carrying amount of the other assets given up. The entity also paid cash. As a result of the exchange, the entity recognized:

Correct answer: a loss equal to the cash given up

Explanation:

Under IFRS, exchanges of dissimilar assets are regarded as exchanges that generate revenue and all gains and losses are recognized. In this problem, the entity gave up cash and an asset in exchange for equipment with a fair value equal to the carrying value of the asset given up. The following JE can be used to illustrate this problem, assuming that the fair value of the new equipment is $10,000 and that $1,500 in cash was paid.

Equipment received 10,000

Loss on exchange 1,500

Asset given 10,000

Cash paid 1,500

I just cannot wrap my head around this. If someone could offer a simple explanation to this that may help me look at this in a different way it would be great. Thanks!

[jpowell31]

i am literally looking at nonmonetary exchanges now and having a panic attack. not sure if i can explain any better as i'm still having a difficult time getting it to stick but…

dissimilar assets under IFRS are treated the same as an exhange that HAS commericial substance under GAAP. when they have commercial substance you recognize all gains/losses/equipment using the FV (given up or received, whichever is more easily determined). in this example the FV received is what is readily determined and for some reason you have to assume that the FV of what was received = FV of the assets given up (i.e. no loss). i think you assume this because the FV of anything you're (selling) is what a buyer would pay for it. i.e the SP in a monetary transaction = FV.

because the entity also PAID cash (i.e. gave up more than what he got back since FV asset received = FV assets given upo he would recognize a loss = to the amount of cash he paid.

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[LeBronJames]

Thanks for the response. But if FV Received (10k) = FV Given, then because we are giving cash of 1,500, wouldn't the FV of the equipment we are giving up be 8,500?

[jpowell31]

i think because it says “other assets given up” and then they ALSO gave cash, that you have to treat the cash separately since cash is boot, not treated like other assets given up in these questions.

this is how the wording always gets me.. in other questions/areas you can't tell when a sentence follows with “they also…”..or ” this amount before adjustments” <— for example, i want to think, before adjustments? soo….do we need to find out if we need to make adjustments by removing the wrong additions/subtractions or these adjustments haven't even been considered yet?? usually i'll waste my time getting an answer not even close to the option before figuring it out.

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[Anonymous]

Shouldn't new asset be recorded at 11500?

DR New equipment 11500

CR Old equipment 10000

CR Cash 1500

?

[Anonymous]

Does 10000 already include 1500?

[LeBronJames]

Wow thanks so much I think I finally had a breakthrough. The FV of other assets AND cash paid part was killing me.

By this logic, FV of Asset received of 10k is equal to our CV of just equipment we are giving up of 10k. Total FV received = Total FV given. Therefore FV of our truck is 8,500. Going just off this we can determine the loss of 1,500 by doing FV – BV.

Also, our new basis in equip is equal to FV given up, 8,500 + 1,500.

The JE would be:

Dr. Equip 10k

Dr. Loss 1.5k

Cr. Equip 10k (comes off at CV)

Cr. Cash 1.5k

Thanks again Jpowell! Goodluck studying!

[jpowell31]

@Anna – that's what i'm having trouble with – the JE – you're probably thinking of an example that used the same amount of consideration given (i.e. FV+boot) as the basis of the new (truck) but I THINK it happens to be a coincidence. the example has Elbert something or another in it.

but the new equipment is actually more like a plug – you have to

CR the old asset (get it off your books so reverse the cost)

CR Cash paid as boot and

CR gain in that example

and you have to reverse the depreciation on the the old asset getting it off your books so your would DR depreciation and the remaining amount would be your new equipment value. in the example above they've just CR the old asset at carrying amount (essentially netting the cost and depreciation) so there are less entries. this wasn't worded well so let me know if that helps.

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[Anonymous]

OK I see what it is now. When FV of asset given up is not known, FV of asset received is used. I thought 10000 was fv of asset given up. If 1 is known, use it to record a new asset, if 1 is not known use 2 etc.

1. FMV given up +/- cash

2. FMV received

3. BV given up +/- cash

I think Elbert truck question was exchange lacking commercial substance

[jpowell31]

ya

the elbert truck one did lack commercial substance they paid more than 25% of total consideration in boot so it was still treated as a monetary transaction. can't remember the facts exactly now though.

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[thechapman]

This may not make you feel better about it, but there's a very small chance of you seeing more than one MCQ on the topic

Passed - 2014

[jpowell31]

@thchapman…zero exams are alike…after taking AUD 3 times i can promise you this much.

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[Author]

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