ch9c - N D X Exchanging Similar Fixed Assets Old equipment...

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Unformatted text preview: N D X Exchanging Similar Fixed Assets Old equipment is often traded in for new equipment having a similar use. In such cases, the seller allows the buyer an amount for the old equipment traded in. This amount, called the trade-in allowance, may be either greater or less than the book value of the old equipment. The remaining balance—the amount owed—is either paid in cash or recorded as a liability. It is normally called boot, which is its tax name. Accounting for the exchange of similar assets depends on whether the transaction has commercial substance.9 An exchange has commercial substance if future cash flows change as a result of the exchange. If an exchange of similar assets has commercial sub- stance, a gain or loss is recognized based on the difference between the book value of the asset given up (exchanged) and the fair market value of the asset received. In such cases, the exchange is accounted for similar to that of a sale of a fixed asset. 9 Stareiwri: of I .-.-?a.-?c.iai' {accounting Srarrdara's No. i53, "Exchanges of Nonmonetary Assets" (Financial Accounting Standards Board, Norwalk, CT: 2004). 416 Chapter 9 Fixed Assets and Intangible Assets Gain on Exchange To illustrate a gain on an exchange of similar assets, assume the following: Similar equipment acquired (new): Price (fair market value) of new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000 Trade-in allowance on old equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _1,109 Cash paid at June 19, date of exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,902 Equipment traded in (old): Cost of old equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,000 Accumulated depreciation at date of exchange . . . . . . . . . . . . . . . . . . . . . . . _3,200 Book value at June 19, date of exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . The entry to record this exchange and payment of cash is as follows: June 19 Accumulated Depreciation—Equipment . . . . . . . . . . . . . 3,200 Equipment (new equipment) . . . . . . . . . . . . . . . . . . . . 5,000 Equipment (old equipment) . . . . . . . . . . . . . . . . . . . 4,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,900 Gain on Exchange of Equipment . . . . . . . . . . . . . . . . 300 The gain on the exchange, $300, is the difference between the fair market value of the new asset of $5,000 and the book value of the old asset traded in of $800 plus the cash paid of $3,900 as shown below. Price (fair market value) of new equipment . . . . . . . . $5,000 Less assets given up in exchange: Book value of old equipment ($4,000 $3,200) $ 800 Cash paid on the exchange . . . . . . . . . . . . . . . . . . _3,90(_) 4,72 Gain on exchange of assets . . . . . . . . . . . . . . . . . . . . ggg Loss on Exchange To illustrate a loss on an exchange of similar assets, assume that instead of a trade—in allowance of $1,100, a trade-in allowance of only $675 was allowed in the preceding ex- ample. In this case, the cash paid on the exchange is $4,325 as shown below. Price (fair market value) of new equipment . . . . . . . . . . . . . . . $5,000 Trade-in allowance of old equipment . . . . . . . . . . . . . . . . . . . . 675 Cash paid at June 19, date of exchange . . . . . . . . . . . . . . . . . . $=4,32§ The entry to record this exchange and payment of cash is as follows: June 19 Accumulated Depreciation—Equipment . . . . . . . . . . . . 3,200 Equipment (new equipment) . . . . . . . . . . . . . . . . . . . . 5,000 Loss on Exchange of Equipment . . . . . . . . . . . . . . . . . 125 Equipment (old equipment) . . . . . . . . . . . . . . . . . . . 4,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,325 The loss on the exchange, $125, is the difference between the fair market value of the new asset of $5,000 and the book value of the old asset traded in of $800 plus the cash paid of $4,325 as shown below. Price (fair market value) of new equipment . . . . . . . . $5,000 Less assets given up in exchange: Book value of old equipment ($4,000 $3,200) . . . $ 800 Cash paid on the exchange . . . . . . . . . . . . . . . . . . _4,325 5,125 Loss on exchange of assets . . . . . . . . . . . . . . . . . . . . $ (125) In those cases where an asset exchange lacks commercial substance, no gain is recog- nized on the exchange. Instead, the cost of the new asset is adjusted for any gain. For ex- ample, in the first illustration, the gain of $300 would be subtracted from the purchase price of $5,000 and the new asset would be recorded at $4,700. Accounting for the exchange of assets that lack commercial substance is discussed in more advanced accounting texts.10 10The exchange of similar assets also involves complex tax issues that are discussed in advanced accounting courses. ...
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This note was uploaded on 07/17/2011 for the course ACCT 102 taught by Professor Martinez during the Summer '11 term at Rio Hondo College.

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ch9c - N D X Exchanging Similar Fixed Assets Old equipment...

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