8 - Nonmonetary Transactions Problems With Solutions
8 - Nonmonetary Transactions Problems With Solutions
8 - Nonmonetary Transactions Problems With Solutions
Also, whenever you have an exchange of assets that involves a substantial amount of cash in
exchange, this is considered to be a monetary exchange and the rules for nonmonetary exchanges
simply do not apply. I included some of these transactions in this document.
Equipment1 7,000
Accumulated Depreciation – Machinery 2,000
Loss on Disposal of Machinery 4,000
Machinery 9,000
Cash 4,000
The consideration received: the equipment will be the same fair value. The transaction has
commercial substance.
The consideration paid is fair value of used vehicle plus cash paid
1
$2,000 + $31,000
Spencer assumes that the amount of cash paid is significant and therefore the transaction is
monetary. In addition, the transaction has commercial substance as the asset obtained will have
different future cash flows than the asset given up. Spencer expects the performance of the asset
to be much improved compared to the old asset, since the vehicle obtained is new.
EXERCISE 10.18
Stacey Limited:
Chokar Limited:
Cash 3,000
Equipment (New) 25,000
Accumulated Depreciation – Equipment 22,000
Loss on Disposal of Equipment1 5,000
Equipment (Old) 55,000
1
Calculation of loss:
Carrying value of old equipment $33,000
Fair value of old equipment 28,000
Loss on exchange $ 5,000
b. The exchange does not have commercial substance:
Stacey Limited:
Chokar Limited:
Cash 3,000
Equipment (New)1 25,000
Accumulated Depreciation - Equipment 22,000
Loss on Disposal of Equipment2 5,000
Equipment (Old) 55,000
2
Fair value of new
equipment + cash $28,000
received ($3,000)
Carrying value of old
equipment (33,000)
Loss on disposal $ (5,000)
1
The new equipment cannot be recorded at cost exceeding its fair value of $25,000.
c. In determining whether the transaction has commercial substance the two companies
would need to determine if they remain in the same economic position after the exchange
as before. If the amount, timing, or risk of future cash flows associated with the equipment
received is different from the configuration of cash flows for the equipment given up, or if
the specific value of the part of the entity affected by the transaction has changed as a
result, the transaction has commercial substance.
EXERCISE 10.19
Since little cash is involved, the transaction is considered nonmonetary. The transaction
does not have commercial substance; therefore, the exchange is recorded at the carrying
amount of the asset(s) given up, which is adjusted for the inclusion of any cash or other
monetary assets.
The transaction has commercial substance, therefore the exchange is recorded at the fair value of
the asset(s) given up.
PROBLEM 10.8
a.
1. Chesley Corporation
Cash 23,000
Machinery (New) 69,000
Accumulated Depreciation – Machinery 50,000
Loss on Disposal of Machinery1 18,000
Machinery (Old) 160,000
1
Calculation of loss: Carrying value $110,000
Fair value (92,000)
Loss $ 18,000
Secord Company
2. Chesley Corporation
Bateman Company
3. Chesley Corporation
Shripad Company
4. Chesley Corporation
Ansong Corporation
Cash 93,000
Inventory (Used) 92,000
Sales Revenue 185,000
To record sale with trade-in
a. Garrison Books
Pisani Books
b. Garrison Books
Pisani Books
No gain may be recognized because the transaction is nonmonetary and lacks commercial
substance. The amount of cash involved is not significant.
c. 1. For Garrison Construction Ltd.: Both methods yield the same entry. However, the
assessment of the transaction as lacking commercial substance should be
reviewed carefully. Since Garrison’s goal is to acquire a larger crane that is more
useful for new contracts, it is questionable whether the smaller old cranes have the
same value in use as the new crane and perform the same function, especially
since two old cranes are exchanged for one new crane. The amount of cash being
considered non-significant should also be examined carefully.
The approach used for method a. presents the culmination of the earnings process for both
companies and is less conservative to Pisani. Given the facts of the two older small cranes
exchanged for one new larger crane, it is more persuasive that this transaction has commercial
substance. The transaction would also represent the culmination of the earnings process for
Pisani Manufacturing since the transaction is with a customer (Garrison) and not with another
manufacturer. Note that each company could very well come to a