[rsiddiqui]

Here is a problem which I was working on:

Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $4,000 cash. The fair value of the truck received was $16,000. At what amount should Amble record the truck received in the exchange under U.S. GAAP?

The answer is 9,600 and I know how they got that but I had a question on the answer. The answer supporting it states, “The question indicates that Amble exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck with a fair value of $16,000 and cash of $4,000. Note that the exchange is for the exact same fair value of $20,000 (with very little apparent difference in timing and a small effect on risk, as some cash was received). Therefore, it is reasonable in this question to assume that the exchange lacks commercial substance under U.S. GAAP.”

My question is what is the exact threshold for risk timing, and the amount of money? How do I know if something is enough for it to be substantial complete

rsiddiqui

[Anonymous]

I'm not aware of a hard-and-fast rule. In the real world, it's usually a judgement call, far as I know. In the CPA Exam world, though, they usually make it pretty clearly one way or the other – either it's clearly almost the exact same or clearly very different.

[lolo]

The amount of cash that you received is 4000 out of 20000 which indicates 20% that is less than 25%, therefore we would recognize a partial gain of 20% (20%*8000=1600). However, if the ratio was 25% or more then we would recognize the whole gain and the new truck would be valued of 16,000.

The transaction for your question case would be the following:

Dr:Cash 4000
Dr:New 9600
Cr: old 12000
Cr: gain 1600

AUD - 95
BEC - 87
FAR - 93
REG - 87

My nick name is Sunshine but the fact is that I have never been in touch with it since I started studying for this CPA exam. I KNOW It HURTS!

My Nick name is sunshine, but the fact is I have not been in touch with it since I started this CPA exam! IT HURTS

AUD - ✔ Passed Becker self study!
BEC - ✔ Passed Becker self study!
FAR - ✔ Passed Becker self study!
REG - TBD

[Anonymous]

Sorry, I think I was thinking it was a different topic in question (like “was it a major difference” was the question).

[lolo]

Got it, sorry did not read the thread till the end! Anyway the answer is that first I look to the question and search for a clear wording of lack/existance of commercial substance if I did not find I search on other words that indicate like “there is/isnt a difference in time risk or nature” if not found I would look at the nature of the assets being exchanged if simmilar I would know it lack of CS if not then it would be CS. Hope this helps!

AUD - 95
BEC - 87
FAR - 93
REG - 87

My nick name is Sunshine but the fact is that I have never been in touch with it since I started studying for this CPA exam. I KNOW It HURTS!

My Nick name is sunshine, but the fact is I have not been in touch with it since I started this CPA exam! IT HURTS

AUD - ✔ Passed Becker self study!
BEC - ✔ Passed Becker self study!
FAR - ✔ Passed Becker self study!
REG - TBD

[rsiddiqui]

Thanks guys for your help. Just a quick concept question, for capitalization cost do you include the purchase price of patents?

rsiddiqui

[lolo]

@rsiddiqui, yea of course, if it was purchased then you should capitalize its price.

AUD - 95
BEC - 87
FAR - 93
REG - 87

My nick name is Sunshine but the fact is that I have never been in touch with it since I started studying for this CPA exam. I KNOW It HURTS!

My Nick name is sunshine, but the fact is I have not been in touch with it since I started this CPA exam! IT HURTS

AUD - ✔ Passed Becker self study!
BEC - ✔ Passed Becker self study!
FAR - ✔ Passed Becker self study!
REG - TBD

[Sophia Dong]

1. boots 4000/fv 20000=20% <25%
2. fv20000-bv12000=8000 realized gain
3. 8000*20%=1600 recognize a partial gain
4. 4000-1600=2400 deferred gain
5. 12000-2400=9600 new bv of asset

[Author]

Replies