Page 455 - Accounting Principles (A Business Perspective)

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Truck (cost of No. 2) (+A) 57,000
Accumulated Depreciation—Trucks (+A) 38,000
Trucks (cost of No. 1) (-A) 45,000
Cash (-A) 50,000
To record the exchange of non-monetary assets
with no
commercial substance (no loss recorded).
Accounting for any gain resulting from exchanges of nonmonetary assets having no commercial substance is
similar to the case where a loss is present but unrecorded. To illustrate, assume that in the preceding example, the

delivery service gave truck No. 1 (now with a fair market value of USD 9,000) and USD 46,000 cash in exchange for
truck No. 2. The gain on the exchange is USD 2,000, but would be unrecorded.
Book value of old truck (No. 1) $ 7,000 1
Cash paid 46,000
Cost of new truck (No. 2) $ 53,000
Fair market value of new truck (No. 2) $ 55,000 1
Less: Gain indicated 2,000 (equal)
Cost of new truck (No. 2) $ 53,000 1
The company would record the new asset at the book value of the old asset (USD 7,000) plus cash paid (USD

46,000). The company deducts the gain from the cost of the new asset (USD 55,000). Thus, the cost basis of the
new delivery truck is equal to USD 55,000 less than the USD 2,000 gain, or USD 53,000. The delivery service uses
this USD 53,000 cost basis in recording depreciation on the truck and determining any gain or loss on its disposal.
The journal entry to record the exchange is:
Cost of trunk No. 1 $ 45,000
Accumulated depreciation 38,000
Book value $ 7,000
Fair market value of old asset
(trade-in allowance) 5,000
Loss indicated (but not recorded) $ 2,000
Firms would realize the gain on an exchange of nonmonetary assets not having commercial substance in future

accounting periods as increased net income resulting from smaller depreciation charges on the newly acquired
asset. In the preceding example, annual depreciation expense is less if it is based on the truck's USD 53,000 cost
basis than if it is based on the truck's USD 55,000 cash price. Thus, future net income per year will be larger.
Trucks (cost of No. 2) (+A) 53,000
Accumulated Depreciation—Trucks (+A) 38,000
Trucks (cost of No. 1) (-A) 45,000
Cash (-A) 46,000
To record exchange of nonmonetary assets with no
commercial substance (no gain recorded).
In Exhibit 93, we summarize the rules for recording nonmonetary asset exchanges.

An accounting perspective:

Uses of technology

Although sophisticated computer systems automatically compute the gain or loss on the disposal of
assets, such programs depend on human input. If an error was made in inputting the type of

Accounting Principles: A Business Perspective 456 A Global Text