1. Why for the question #92 you use Book Value to compute cost of the equipment
ID: 341894 • Letter: 1
Question
1. Why for the question #92 you use Book Value to compute cost of the equipment as BV of 450000 + Cash given up of 90000 = 540000, BUT for the questions #93 you use Fair Value to compute cost of the equipment as FV of 270000 + Cash given up of 42000 =312000?
2. Why for the #92 you don’t record any gain or loss BUT you record the loss for #93? If in both cases the exchange LACKS Commercial Substance, so the instructions are the same for both cases then why computation are different? Use the following information to answer questions 92 & 93. Below is the information relative to an exchange of assets by Stanton Company. The exchange lacks commercial substance. Old Equipment Book Value $450,000 $300,000 Fair Value $510,000 $270,000 Cash Paid $90,000 $42,000 CaseI Case lI 92. Which of the following would be correct for Stanton to record in Case 1? Record Equipment at: Record a gain of (loss) of: a. b. C. d. $540,000 $600,000 $450,000 $540,000 $0 $60,000 $(30,000) $60,000 Ans: A. 93. Which of the following would be correct for Stanton to record in Case l1? a. b. C. d. $342,000 $300,000 $312,000 $300,000 $30,000 $12,000 $(30,000) $(12,000) Ans: C.
Explanation / Answer
As per Statement of Financial Accounting Standards (SFAS) No. 153 For exchanges that lack commercial substance: a. If FV of asset Exchanged > BV of asset Exchanged --> Do not recognize gain --> Use BV (which is lower than FV) as cost basis of the acquired asset Accordingly, cost basis of new asset in case I Ques. 92 (450000+90000)=540000 $ the journal entry is New asset(450000+90000) 540000 Cash 90000 Old asset- BV 450000 (No loss or gain) (ANSWER: 92: a.) b. If FV of asset surrendered Recognize loss --> Use FV (which is lower than BV) as cost basis of acquired asset Accordingly, cost basis of new asset in case iI Ques. 93 (270000+42000)=540000 $ the journal entry is New asset(270000+42000) 312000 Loss on exchange 30000 Cash 42000 Old asset- BV 300000 (No loss or gain) (ANSWER: 92: c.) Answer to Your questions 1. It is as per SFAS guidelines--lower of the two,FV & BV , should be used as the cost basis. 2. As per GAAP, in exchanges lacking commercial substance, only loss on exchange needs to be accounted. Gain is not recognised in books ,but adjusted against the cost of the new asset (ie.the new asset is recorded at the exchange/reduced value. Hence the name, lacking commercial sense.Related Questions
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