Page 453 - Accounting Principles (A Business Perspective)

11. Plant asset disposals, natural resources, and intangible assets

substance. However, if the future cash flows are likely to be significantly different, then the exchange of similar
assets has commercial substance.
Exchanges of nonmonetary assets having commercial substance For exchanges of nonmonetary assets

that have commercial substance, accountants record the new asset at the fair market value of the asset received or
the asset(s) given up, whichever is more clearly evident. When the cash price of the new asset is stated, they use the
cash price to record the new asset. If the cash price is not stated, they assume that the fair market value of the old
asset plus any cash paid would equate to the cash price of the new asset and use that value to record the new asset.
Thus, accountants would normally record the asset received at either (1) the stated cash price of the new asset or (2)
a known fair market value of the asset given up plus any cash paid.
Debiting accumulated depreciation and crediting the old asset removes the book value of the old asset from the

accounts. The firm credits the Cash account for any amount paid. If the amount at which the new asset is recorded
exceeds the book value of the old asset plus any cash paid, a company records a gain to balance the journal entry. If
the situation is reversed, it records a loss to balance the journal entry. To illustrate such an exchange having
commercial substance, assume a company exchanges an old machine for a new delivery truck. The future cash flows
from the exchange are expected to be significantly different and, therefore, the exchange has commercial substance.
The machine cost USD 45,000 and had an up-to-date accumulated depreciation balance of USD 38,000. The truck
had a USD 55,000 cash price and was acquired by trading in the machine with a fair value of USD 3,000 and paying
USD 52,000 cash. The journal entry to record the exchange is:

Trucks (+A) 55,000
Accumulated Depreciation—Machinery (+A) 38,000
Loss from Disposal of Plant Assets (-SE) 4,000
Machinery (-A) 45,000
Cash (-A) 52,000
To record loss on exchange of dissimilar plant
assets.
Another way to compute the USD 4,000 loss on the exchange is to use the book value of the old asset less the fair
market value of the old asset. The calculation is as follows:
Machine cost $ 45,000
Accumulated depreciation 38,000
Book value $ 7,000
Fair market value of old asset
(trade-in allowance) 3,000
Loss realized $ 4,000

To illustrate the recognition of a gain from such an exchange having commercial substance, assume that the fair
market value of the machine was USD 9,000 instead of USD 3,000, and that only USD 46,000 was paid in cash.
The journal entry to record the exchange would be:
Trucks (+A) 55,000
Accumulated Depreciation—Machinery (+A) 38,000
Machinery (-A) 45,000
Cash (-A) 46,000
Gain on Disposal of Plant Assets(+SE) 2,000
To record gain on exchange of dissimilar assets.

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