When fair value cannot be determined or the exchange

Info iconThis preview shows pages 20–26. Sign up to view the full content.

View Full Document Right Arrow Icon
When fair value cannot be determined or the exchange lacks commercial substance, the asset(s) acquired are valued at the book value of the asset(s) given up, plus (or minus) any cash exchanged. No gain or loss is recognized.
Background image of page 20

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
10-21 Fair Value Not Determinable Lacie's Inc. exchanged used equipment for newer equipment. Due to the nature of the assets exchanged, Lacie's could not determine the fair value of the asset given up or received. The asset given up originally cost $600,000, and had an accumulated depreciation balance of $400,000 at the time of the exchange. Lacie's exchanged the asset and paid $100,000 cash. Let’s record this unusual transaction.
Background image of page 21
10-22 Fair Value Not Determinable The journal entry below shows the proper recording of the exchange. The newer equipment is recorded at the book value given up plus the cash paid because fair value is not known. The journal entry below shows the proper recording of the exchange. The newer equipment is recorded at the book value given up plus the cash paid because fair value is not known. Equipment ($200,000 + $100,000) ................. 300,000 Accumulated depreciation ….……………. ....... 400,000 Equipment ……………………………. 600,000 Cash …………………………. ............ 100,000 To record equipment acquired in exchange.
Background image of page 22

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
10-23 Exchanges When exchanges are recorded at fair value, any gain or loss is recognized for the difference between the fair value and book value of the asset(s) given up. To preclude the possibility of companies engaging in exchanges of appreciated assets solely to be able to recognize gains , fair value can only be used in legitimate exchanges that have commercial substance. A nonmonetary exchange is considered to have commercial substance if the company expects a change in future cash flows as a result of the exchange. A nonmonetary exchange is considered to have commercial substance if the company expects a change in future cash flows as a result of the exchange.
Background image of page 23
10-24 Exchanges – Fair Value Greater than Book Value Lacie's Inc. exchanged new equipment and $10,000 cash for equipment owned by Float Inc. Below is information about the asset exchanged by Lacie's. Record the transaction assuming the exchange has commercial substance. Gain = Fair Value – Book Value Gain = $205,000 – $200,000 = $5,000
Background image of page 24

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
10-25 Record the same transaction assuming the exchange lacks commercial substance . Equipment . .............................................. 215,000 Accumulated depreciation………. ............ 300,000 Equipment ……………………… 500,000 Cash ……………………………. 10,000 Gain on exchange ……………. . 5,000 To record the exchange of equipment. $205,000 fair value + $10,000 cash Equipment . .............................................. 210,000 Accumulated depreciation………. ............ 300,000 Equipment ……………………… 500,000 Cash ……………………………. . 10,000 To record the exchange of equipment.
Background image of page 25
Image of page 26
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page20 / 28

When fair value cannot be determined or the exchange lacks...

This preview shows document pages 20 - 26. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online