Nonmonetary Exchange Lacking Commerial Substance

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  • #191015
    jm962011
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    I am so confused!

    So after reading the explanation and going back to the text, in the following example, I would agree that this is a monetary exchange because boot > 25%, therefore, both parties should recognize a gain or loss. But, in the next question, I am totally confused about the explanation, why doesn’t the explanation say both parties should recognize a gain or loss because boot > 25%?

    Question 1

    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:15,000

    Elbert’s Delivery Company should record the new truck at: 13,000

    Explanation:

    The new truck is recorded at $13,000 on Elbert’s books. In this case, the transaction is considered to be a monetary exchange, because the boot ($10,000) exceeds 25% of the total consideration ($10,000 plus $3,000 fair value of the old truck transferred to Wanda). Therefore, both parties to the exchange recognize all gains and losses on the transaction.

    Question 2

    May Co. and Sty Co. exchanged nonmonetary assets. The exchange did not result in a significant difference in cash flows for either company. May paid cash to Sty in connection with the exchange. To the extent that the amount of cash exceeds a proportionate share of the carrying amount of the asset surrendered, a realized gain on the exchange should be recognized by:

    Sty Co. ONLY

    Explanation:

    Per ASC Topic 845, when a nonmonetary exchange transaction does not result in a significant difference in cash flows, the book value is used to record the transaction. However, when the exchange of nonmonetary assets includes an amount of monetary consideration, the receiver of monetary consideration has realized a partial gain on the exchange. To determine the partial gain to be recognized, first compute the total gain which is the difference between the fair market value of the nonmonetary asset given up and its book value. Then multiply the ratio of the monetary consideration received to the total consideration received (i.e., monetary consideration plus the estimated fair market value of the asset received) times the total gain. The result is the realized gain to be recognized. The entity paying the monetary consideration should not recognize any gain. Note, however, that all losses on sales or exchanges are recognized immediately.

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