@Rocky, this is what I wrote in another thread. I hope it helps.
Nonmonetary exchanges are rather simple. Think of it this way: If I give you a Galaxy Note 3 and you give me a Galaxy Note 3 and they are both in the same condition, did anything really change? I had a Galaxy Note 3 before the transaction and I have a Galaxy Note 3 after the transaction. I’m in the same position. Now what if I give you an iPhone and you give me a Galaxy, did anything change? You bet! I got a much, much better asset, a Galaxy! So I had a gain. (Sorry iPhone fans, but iPhone sucks.)
That’s nonmonetary exchanges in short. If there’s a real change (it has economic substance), there’s a transaction and we can realize a gain. If there’s no real change (it lacks economic substance), there’s was no transaction and you can’t realize a gain.
Why is this impotent? Because a company can make artificial profit. Let’s go back to the Galaxy for Galaxy transaction. Let’s say that my Galaxy cost me 100 and I depreciated half of it. My BV is 50. Now if the Galaxy has a FV of 70 (which, of course, I can’t realize as long as there’s a sale), I can just exchange it with you for your Galaxy and realize the gain. JE
DE: Your Galaxy 70
DE: Accu. Dep. 50
CR: My Galaxy 100
CR: Gain 20
Ain’t I smart?
GAAP says no. We can’t do that. There was no real sale here. You must record the new Galaxy for the BV of the old. JE
DE: Your Galaxy 50
CR: My Galaxy 50
This is the basic concept.
Then it gets a bit complicated. What happens if there’s cash involved as well. Say your Galaxy’s FV is 80 and mine is 70, so I’ll give you my Galaxy plus 10 dollars. Again, it lacks economic substance so you can’t record a gain. You just record the new Galaxy for the BV of your Galaxy plus the amount paid. JE
DE: Your Galaxy 60
CR: My Galaxy 50
CR: Cash 10
What will happen if you receive cash? You can record a gain. How much gain? It depends if the cash is big part of the transaction. If it is 25% or more of the total value you receive, you recognize the full gain. In our example, if you get 30 plus his Galaxy (FV 70), the cash is 30% of the transaction (cash 30/by FV 70 + cash 30), you recognize the full gain. JE
DE: Your Galaxy 70
DE: Cash 30
CR: My Galxy 50
CR: Gain 50
If, however, the cash received isn’t a major part of the deal, you recognize only a partial gain. The total gain is the potential gain * cash received/ total assets received. In our example, say you’re getting his Galaxy plus 10. So you’re getting 70 FV of his Galaxy plus 10 = 80. 10/80 =.125. That’s less than 25%. Your potential gain is 30 (80 received – 50 BV of your Galaxy), so your gain is 3.75 (30*.125). JE
DE: Your Galaxy 43.75 (PLUG)
DE: Cash 10
CR: My Galxy 50
CR: Gain 3.75
This JE is a bit complicated at the first glance. But it’s not. We have all amount but the debit for Your Galaxy. We start with cash, we know it’s 10, we also know MY Galaxy has a BV of 50, and we figured out the gain of 3.75. The only thing that’s left to do is figure out how much we should record Your Galaxy for. It’s the difference between the debits and the credits, 50+3.75-10=43.75.
One more thing: you always record a loss.
In short: ALWAYS record a loss. Never record a gain if you paid cash. If you received cash, you can record a gain (the 25% rule).