FAR – Nonmonetary exchanges with commercial/lack commerical substance

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  • #188996
    Rocky123
    Member

    I have been spinning my wheels on this concept. Can someone please give me a few examples of how this works?

    The tallest oak in the forest was once just a little nut that held its ground.

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    Rocky123, CPA

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  • #610675
    JoJo
    Member

    I viewed CPAexcel's lectures last night. I had trouble keeping the various scenarios of lack of substances, FV determinablity, and gain allocation straight in mind. I have not completed the MCQ yet.

    REG - 77 (05/30/14); Failed (11/28/09)
    BEC - TBD; Failed (05/29/09)
    FAR - 74 (04/30/15);
    AUD - TBD

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    #610676
    Rocky123
    Member

    This is frustrating me beyond belief

    The tallest oak in the forest was once just a little nut that held its ground.

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    Rocky123, CPA

    #610677
    waffle_house
    Participant

    Lacks commerical substance —> No gain can be recognized (only gain that can be recognized is any boot(cash) received). Asset acquired is recorded at book value of the asset given up.

    Has commerical substance—> Gains/Losses can be recognized. New asset is recorded at the Fair Value of the asset given up (unless the asset acquired has a Fair Value that is easier to determine).

    AUD - 80
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    FAR - 84
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    Exams started Sep 2014 -Exams done Mar 2017

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    I put in work, it was evident

    #610678
    Rocky123
    Member

    So, If I exchange my car for your car, it lacks commerical substance. Cash flow is not affected.

    My car:

    FMV: $20,000

    BV: $16,000

    Your car:

    FMV: $19,000

    There is no gain or loss because cash is not involved. I would record your car on my books at $16,000. Is that correct?

    The tallest oak in the forest was once just a little nut that held its ground.

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    Rocky123, CPA

    #610679
    Rocky123
    Member

    Same senario, except you give me $1,000 and your car.

    What is the gain/loss recognized? And what would record on my books at the value of your car?

    The tallest oak in the forest was once just a little nut that held its ground.

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    Rocky123, CPA

    #610680
    qarnism
    Participant

    First step you have to check..is the boot you received is 25% or less, then you recognize a gain proportionally, based on following formulla:

    Recognized gain = total gain * (boot received ÷ total consideration received)

    BUT if boot >25% then recognize gain in full..

    in your case (1000/2000=5%) so, you are in first one:

    Recognized proportional gain = total gain * (boot received ÷ total consideration received)

    4000*(1000/20000) = 200

    other Car 15200 (plug)

    Cash 1000

    your car 16000 (BV)

    Gain 200

    #610681
    qarnism
    Participant

    other Car …….15200 (plug)

    Cash ……………1000

    …………..your car …………….16000 (BV)

    ……………Gain …………………….200

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