8 – NonMonetary Transactions
Problems with Solutions
Note – in ALL of the exercises/problems below, if a relatively small amount of cash is
exchanged in the transaction treat it as follows: if there is commercial substance, record the
incoming asset at its FV adjusted for cash paid/received (i.e. if cash is paid, it would increase the
value of the incoming asset). If there is no commercial substance, record the incoming asset at
it’s carrying value adjusted for the cash exchange (i.e. if cash is paid, it would increase the
carrying value of the incoming asset and if cash is received it would decrease the carrying value
of the incoming asset).
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.
Lastly, unless you are told otherwise, assume IFRS.
Brief Exercises 10.11, 10.12
Exercise 10.18, 10.19
Problem 10.8a, 10.9
The items in bold are the ones I recommend you do first.
BRIEF EXERCISE 10.11
Equipment1 7,000
Accumulated Depreciation – Machinery 2,000
Loss on Disposal of Machinery 4,000
Machinery 9,000
Cash 4,000
The consideration paid is fair value of machinery plus cash
1
$3,000 + $4,000 = $7,000
The consideration received: the equipment will be the same fair value. The transaction has
commercial substance.
BRIEF EXERCISE 10.12
Vehicles (new)1 33,000
Loss on Disposal of Vehicles 1,000
Accumulated Depreciation - Vehicles 27,000
Vehicles (used) 30,000
Cash 31,000
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
a. The exchange has commercial substance:
Stacey Limited:
Equipment (New)1 28,000
Accumulated Depreciation – Equipment 31,250
Equipment (Old) 50,000
Cash 3,000
Gain on Disposal of Equipment2 6,250
1 2
Valuation of new equipment: Calculation of gain:
Fair value of $25,000 Fair value of old
equip. given equipment $25,000
Cash 3,000 Carrying value of old
equipment (18,750)
New equip. $28,000 Gain on disposal $ 6,250
Note: Since little cash is involved, the transaction is considered nonmonetary.
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:
Equipment (New)1 21,750
Accumulated Depreciation – Equipment 31,250
Equipment (Old) 50,000
Cash 3,000
1
Valuation of new equipment:
Carrying value of old
equipment $18,750
Cash paid 3,000
New equipment $21,750
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
a. Equipment (New)1 50,100
Accumulated Depreciation - Equipment 20,000
Equipment (Old) 65,000
Cash 5,100
1
Valuation of new equipment:
Cash $4,000
Installation cost
(cash) 1,100
Carrying value of
old equipment 45,000
New equipment $50,100
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.
b. Equipment (New)1 55,900
Accumulated Depreciation—Equipment 20,000
Gain on Disposal of Equipment2 5,800
Equipment (Old) 65,000
Cash 5,100
1 2
Valuation of new equipment: Calculation of gain:
Cash $4,000
Installation cost Fair value of old
(cash) 1,100 equipment $50,800
Fair value of Carrying value of
old equipment 50,800 old equipment (45,000)
New equipment $55,900 Gain on disposal $ 5,800
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
Machinery (New) 92,000
Accumulated Depreciation – Machinery 45,000
Loss on Disposal of Machinery2 6,000
Cash 23,000
Machinery (Old) 120,000
2
Calculation of loss: Carrying value $ 75,000
Fair value (69,000)
Loss $ 6,000
2. Chesley Corporation
Machinery (New)3 92,000
Accumulated Depreciation - Machinery 50,000
Loss on Disposal of Machinery 18,000
Machinery (Old) 160,000
3
the new machinery cannot be recorded at a cost higher than its fair value.
Bateman Company
Machinery (New) 76,000
Accumulated Depreciation - Machinery 71,000
Machinery (Old) 147,000
*It is assumed the transaction lacks commercial substance.
3. Chesley Corporation
Machinery (New) 4 100,000
Accumulated Depreciation - Machinery 50,000
Loss on Disposal of Machinery 18,000
Machinery (Old) 160,000
Cash 8,000
4
the new machinery cannot be recorded at a cost higher than its fair value.
Shripad Company
Machinery (New) 77,000
Accumulated Depreciation – Machinery 75,000
Cash 8,000
Machinery (Old) 160,000
4. Chesley Corporation
Machinery (New) ($92,000 + $93,000) 185,000
Accumulated Depreciation - Machinery 50,000
Loss on Disposal of Machinery 18,000
Machinery (Old) 160,000
Cash 93,000
Ansong Corporation
Cash 93,000
Inventory (Used) 92,000
Sales Revenue 185,000
To record sale with trade-in
Cost of Goods Sold 130,000
Inventory 130,000
To record cost of goods sold
PROBLEM 10.9
a. Garrison Books
1. Equipment (new) 198,000
Accumulated Depreciation – Equipment
(Crane #6RT) 15,000
Accumulated Depreciation – Equipment
(Crane #S79) 18,000
Loss on Disposal of Equipment1 1,500
Cash 17,500
Equipment (Crane #6RT) 130,000
Equipment (Crane #S79) 120,000
1
Calculation of Loss on Disposal:
Fair value of Crane #6RT $128,000
Carrying value of Crane #6RT (115,000)
Gain $13,000
Fair value of Crane # S79 $87,500
Carrying value of Crane # S79 (102,000)
Loss $14,500
Net loss = $14,500 – $13,000 = $1,500
Pisani Books
2. Inventory (Used) 215,500
Sales Revenue 198,000
Cash 17,500
Cost of Goods Sold 165,000
Inventory 165,000
b. Garrison Books
1. Equipment (New) 2 198,000
Accumulated Depreciation—Equipment
(Crane #6RT) 15,000
Accumulated Depreciation—
Equipment (Crane #S79) 18,000
Loss on Disposal of Equipment 1,500
Cash 17,500
Equipment (Crane #6RT) 130,000
Equipment (Crane #S79) 120,000
2
Carrying amount of the assets given up = $217,000 [($130,000 – $15,000) + ($120,000 -
$18,000)]; however, the fair value of the asset plus cash acquired of $215,500 ($198,000 +
$17,500) is less than that amount. Therefore, a loss is recognized for the difference between
carrying amount of the assets given up and fair value of the assets acquired. The same entry as
part a. is recorded.
Pisani Books
2. Inventory (Used) 182,500
Inventory 165,000
Cash 17,500
No gain may be recognized because the transaction is nonmonetary and lacks commercial
substance. The amount of cash involved is not significant.
Because the transaction lacks commercial substance, it is recognized as an exchange of inventory
and not as a sale with a corresponding cost of goods sold.
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.
2. For Pisani Manufacturing Inc.: Method b. where revenue is not recognized is
more conservative. It is questionable, however, whether the transaction lacks
commercial substance in this case especially since two old cranes are exchanged
for one new crane. Where the exchange involves relatively similar inventory
items and the exchange takes place to facilitate a sale to an outside customer, the
earnings process is not considered completed. This is not clearly evident in this
problem. The final decision should be based on an analysis of the effect on future
cash flows, the basis for determining commercial substance.
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
