(1)
Nonmonetary Exchange
Exchange of non-monetary assets for another non-monetary asset is known as nonmonetary exchange.
Exchange has commercial substance:
If an exchange (Example: exchange of land for another non-monetary asset other than land) is likely to have a change in the future cash flows, then it is known as exchange has commercial substance. In this case, an exchange of non-monetary assets, which have commercial substance, is recorded at its fair value, and then resulted gain or loss must be recognized by determining the difference between the fair value and book value.
Exchange lacks commercial substance:
If an exchange (Example: exchange of land for another land) is expected that it will not change the future cash flows, then such exchange is known as exchange lacks commercial substance. In this case, an exchange lacks commercial substance; therefore new non-monetary asset would be valued at the book value of the old non-monetary asset.
To determine: The fair value of the new parcel land, which is received by Company T.
(1)
Explanation of Solution
This is an exchange which has commercial substance. Thus, the fair value of new land is equivalent to the sum of fair value of old land and amount of cash paid in addition to the exchange.
Hence, the fair value of the new parcel land is $86,000.
(2)
To prepare: The
(2)
Explanation of Solution
Prepare an entry to record the exchange of old land for new land, which has commercial substance.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Land – New | 86,000 | |||
Cash | 14,000 | |||
Land – Old | 30,000 | |||
Gain on trade-in (Balancing figure) | 42,000 | |||
(To record the exchange of old land for new land, which has commercial substance) |
Table (1)
- Land is an asset account; purchase of new land is debited to increase its value by $86,000.
- Cash is an asset account, which is decreased by $14,000. Hence, it is credited by $14,000.
- Old land is exchanged for new land. Hence, old land is credited to decrease its balance by $30,000 (original cost).
- Value of new land received is higher than the fair value of old land plus payment of cash by $42,000. Hence, gain on trade in account is credited with $42,000.
(3)
To prepare: The journal entry, to record the exchange of old land for new parcel land, assumes that the exchange lacks commercial substance.
(3)
Explanation of Solution
Prepare an entry to record the exchange of old land for new land,assume that the exchange lacks commercial substance.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Land – New | 44,000 | |||
Cash | 14,000 | |||
Land – Old | 30,000 | |||
(To record the exchange of old land for new land, which lacks commercial substance) |
Table (2)
This exchange lacks commercial substance. Thus, the fair value of new land is equivalent to the sum of book value of old land and amount of cash paid in addition to the exchange.
- Land is an asset account; purchase of new land is debited to increase its value by $44,000.
- Cash is an asset account, which is decreased by $14,000. Hence, it is credited by $14,000.
- Old land is exchanged for new land. Hence, old land is credited to decrease its balance by $30,000 (original cost).
(4)
To prepare: The journal entry, to record the exchange of old land for new parcel land, which lacks commercial substance.
(4)
Explanation of Solution
Prepare an entry to record the exchange of old land for new land, which lackscommercial substance.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Land – New (Balancing figure) | 22,500 | |||
Cash | 18,000 | |||
Land – Old | 30,000 | |||
Gain on trade-in | 10,500 | |||
(To record the exchange of old land for new land, which lacks commercial substance) |
Table (3)
Working note:
Calculate the gain on trade in.
- Land is an asset account; purchase of new land is debited to increase its value by $22,500.
- Cash is an asset account, which is increased by $18,000. Hence, it is debited by $18,000.
- Old land is exchanged for new land. Hence, old land is credited to decrease its balance by $30,000 (original cost).
- Value of new land received plus cash received is higher than the fair value of old land. Hence, gain on trade in account is credited with $10,500.
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Chapter 10 Solutions
INTERMEDIATE ACCTG W/CONNECT HARDCOVER
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