FAR Lack of Commercial Substance

  • Creator
    Topic
  • August 12, 2019 at 9:00 pm #2627118
    AndreA
    Participant

    I would appreciate any help!
    What would be the journal entry in this case for Company A?
    Assume No Commercial Substance, exchange of old truck Company A for a new truck Company B (no cash payment has been made)

    Company A
    FV?
    CV 100,000
    Depreciation 40,000

    Company B
    FV 50,000
    CV 70,000

    Dr: Equipment (new) 50,000
    Dr: Accum. depr. 40,000
    Dr: Loss 10,000?
    Cr: Equipment (old) 100,000

    Is that correct?

    FAR - 73, 78 (WileyCPAexcel 3,000+ MCQs, 50 SIMs)
    AUD - 73, 81 (WileyCPAexcel 3,000+ MCQs, 40 SIMs)
    BEC - 71, 71, 74, 84 (WileyCPAexcel 3,000+ MCQs, 10 SIMs)
    REG - 84 (WileyCPAexcel 2,000 MCQs, 15 SIMs)

    CA Ethics Exam - 94%

    NEVER GIVE UP.

Viewing 5 replies - 1 through 5 (of 5 total)
  • Author
    Replies
  • August 14, 2019 at 5:31 am #2629770
    Mike J
    Participant

    If there is no commercial substance, you cannot treat it like a sale. You cannot use the new asset fair value, in essence it is as though nothing happened.

    As far as the journal entry, I believe it is a debit to a “new” asset of 70 and a credit to the “old” asset of 100. Debit a loss account as a plug.

    Someone correct me if I'm wrong.

    AUD - 90
    BEC - 79
    FAR - 77
    REG - 77
    They don't trust JUST ANYBODY to count beans
    August 14, 2019 at 10:45 am #2630208
    AndreA
    Participant

    Thank you for your respond!
    If I understand correctly, CV of an asset given up is greater than
    the FMV and CV of an asset received. Since the
    question does not mention anything about the FMV of the
    asset given up, we will assume it is equal to FMV of
    asset received (as per ASC Topic 845) and my entries should be correct.

    FAR - 73, 78 (WileyCPAexcel 3,000+ MCQs, 50 SIMs)
    AUD - 73, 81 (WileyCPAexcel 3,000+ MCQs, 40 SIMs)
    BEC - 71, 71, 74, 84 (WileyCPAexcel 3,000+ MCQs, 10 SIMs)
    REG - 84 (WileyCPAexcel 2,000 MCQs, 15 SIMs)

    CA Ethics Exam - 94%

    NEVER GIVE UP.

    August 14, 2019 at 10:57 am #2630250
    say
    Participant

    Your entry is correct. When there is no commercial substance and you don't know what the FV of the asset given up is, you record it at the FV of the asset received.

    August 14, 2019 at 12:26 pm #2630412
    Mike J
    Participant

    Point of clarification. I thought that you don't use FV–question does give FV for both at 100 and 50, resp.–because the transaction lacks commercial substance.

    AUD - 90
    BEC - 79
    FAR - 77
    REG - 77
    They don't trust JUST ANYBODY to count beans
    August 14, 2019 at 1:12 pm #2630538
    AndreA
    Participant

    Thank you everyone for help! I really appreciate that!

    FAR - 73, 78 (WileyCPAexcel 3,000+ MCQs, 50 SIMs)
    AUD - 73, 81 (WileyCPAexcel 3,000+ MCQs, 40 SIMs)
    BEC - 71, 71, 74, 84 (WileyCPAexcel 3,000+ MCQs, 10 SIMs)
    REG - 84 (WileyCPAexcel 2,000 MCQs, 15 SIMs)

    CA Ethics Exam - 94%

    NEVER GIVE UP.

  • Author
    Replies
Viewing 5 replies - 1 through 5 (of 5 total)
  • You must be logged in to reply to this topic.