Nonmonetary Exchanges

  • Creator
    Topic
  • #189767
    Rocky123
    Member

    I cannot seem to grasp nonmonetary exchanges. I use Becker. I’ve rewatched the lecture, reread the book, and did the mc’s multiple times. IT’S JUST NOT SINKING IN.

    This is way worse than leases and bonds! LOL.

    Any tips?

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

    AUD-PASS
    BEC-PASS
    REG-PASS
    FAR-PASS

    Rocky123, CPA

Viewing 5 replies - 1 through 5 (of 5 total)
  • Author
    Replies
  • #616402
    Anonymous
    Inactive

    @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).

    #616403
    Rocky123
    Member

    I sort of get it. So, for example, I make the following exchange with you:

    My Becker book:

    BV: $10

    FMV: $13

    Your Ninja book:

    BV: $15

    FMV: $18

    Is this how I would record the transaction: ???

    Debit Your Ninja book: $10

    Credit My Becker book: $10

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

    AUD-PASS
    BEC-PASS
    REG-PASS
    FAR-PASS

    Rocky123, CPA

    #616404
    Anonymous
    Inactive

    Yes. Unless, of course, it will drastically change your studying and chances of passing the exam. If it would, than you'll record a gain. JE

    DE: Your Ninja book 13

    CR:My Becker book: 10

    CR: Gain 3

    That's if you know the FMV of My Becker. If you only know the FMV of Your Ninja, than you'll record it at 18. JE

    DE: Your Ninja book 18

    CR:My Becker book: 10

    CR: Gain 8

    #616405
    Rocky123
    Member

    I wish they had chat on this forum. LOL.

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

    AUD-PASS
    BEC-PASS
    REG-PASS
    FAR-PASS

    Rocky123, CPA

    #1832405
    Anonymous
    Inactive

    Hi,

    I have a non-monetary exchange that lacks commercial substance. No boot is exchanged in the transaction.

    On April 1 year 2, I exchange a truck for another truck. I bought the truck on Jan. 1 year 1 for $100. I have been depreciating the truck S/L over 5 years. $20 Depreciation/year. My accounting treatment is to record depreciation expense at year end.

    The CV of my truck is now 80 after year 1. Will take partial year depreciation ($5) for year 2 when I exchange my Truck for the second Truck?

    Any help would be appreciated!

    Thanks.

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