13-1 Asset Retirements Involving Exchanges Chapter 13 Illustrated Solution: Exercise 13-27

13-2 Determining Market Value Cost – Accumulated Depreciation = Book Value Market Value

13-3 $52,000Cost ?– Accumulated Depreciation $35,000= Book Value $40,000Market Value Determining Market Value

13-4 $52,000Cost $17,000– Accumulated Depreciation $35,000= Book Value $40,000Market Value Determining Market Value

13-5 Sales Price – Book Value = Gain (Loss) $52,000Cost $17,000– Accumulated Depreciation $35,000= Book Value $40,000Market Value Determining Market Value

13-6 Sales Price – Book Value = Gain (Loss) Loss—Recognize entire loss, no exceptions. $52,000Cost $17,000– Accumulated Depreciation $35,000= Book Value $40,000Market Value Determining Market Value

13-7 Loss—Recognize entire loss, no exceptions. Gain—Can any of the gain be deferred? Determining Market Value $52,000Cost $17,000– Accumulated Depreciation $35,000= Book Value $40,000Market Value

13-8 Exchange of Similar Assets Theory:When exchanging similar assets, there may not be a culmination of the earnings process.

13-9 Exchange of Similar Assets Theory:When exchanging similar assets, there may not be a culmination of the earnings process. If Market Value > Book Value, then accumulated depreciation to date exceeds the decline in market value to date. However, if the company uses the asset until the end of the useful life, this difference may no longer exist. That is, at the end of the useful life, book value may equal market value which would result in a gain of zero on disposal.

13-10 Theory:When exchanging similar assets, there may not be a culmination of the earnings process. If Market Value > Book Value, then accumulated depreciation to date exceeds the decline in market value to date. However, if the company uses the asset until the end of the useful life, this difference may no longer exist. That is, at the end of the useful life, book value may equal market value which would result in a gain of zero on disposal. In some cases, an exchange of similar assets is treated as if the new asset is a continuation of the original asset. And, the gain (or part of the gain) as of the transaction date may be deferred until the new asset is retired. Exchange of Similar Assets

13-11 Part (a)—Dissimilar Assets Question: Are the assets similar? Answer: No, therefore recognize entire gain. 1

13-12 Text p. 761 Recognition of Gain on Exchange of Assets

13-13 Text p. 761 Recognition of Gain on Exchange of Assets

13-14 Part (a)—Dissimilar Assets Question: Are the assets similar? Answer: No, therefore recognize entire gain. Question: Is there any gain? Answer: Yes, but how much? List price  Market Value 1 2

13-15 Question: Are the assets similar? Answer: No, therefore recognize entire gain. Question: Is there any gain? Answer: Yes, but how much? List price  Market Value Since the Market Value of the old machine was stated as $40,000, we assume the market value of the new truck is also $40,000 (arm’s-length transaction). Part (a)—Dissimilar Assets 1 2

13-16 $52,000Cost $17,000– Accumulated Depreciation $35,000= Book Value $40,000Market Value Part (a)—Dissimilar Assets Sales Price — Book Value = Gain (Loss). $40,000 —$35,000 = $5,000

13-17 Part (a)—Dissimilar Assets Truck (new)…………………………………..40,000 Steps for exchange of dissimilar assets Record the new truck at FMV. 1

13-18 Part (a)—Dissimilar Assets Truck (new)…………………………………..40,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Steps for exchange of dissimilar assets Record the new truck at FMV. Remove all items related to the old machine. 1 2

13-19 Part (a)—Dissimilar Assets Truck (new)…………………………………..40,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Gain on Exchange of Machinery…………5,000 Steps for exchange of dissimilar assets Record the new truck at FMV. Remove all items related to the old machine. Record any gain or loss

13-20 Truck (new)…………………………………..40,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Gain on Exchange of Machinery…………5,000 Steps for exchange of dissimilar assets Part (a)—Dissimilar Assets Record the new truck at FMV. Remove all items related to the old machine. Record any gain or loss

13-21 Part (b)—Similar Assets, No Cash When similar assets are exchanged without any cash involved, the new asset is recorded at the book value of the old asset. This effectively defers all gains.

13-22 Recognition of Gain on Exchange of Assets Text p. 761

13-23 Text p. 761 Recognition of Gain on Exchange of Assets

13-24 Text p. 761 Recognition of Gain on Exchange of Assets

13-25 Text p. 761 Recognition of Gain on Exchange of Assets

13-26 When similar assets are exchanged without any cash involved, the new asset is recorded at the book value of the old asset. This effectively defers all gains. Since all gains are deferred, any difference between list price and market value becomes moot. Part (b)—Similar Assets, No Cash

13-27 Part (b)—Similar Assets, No Cash Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Steps for exchange of similar assets—no cash Remove all items related to the old machine. 1

13-28 Part (b)—Similar Assets, No Cash Machine (new)……………………………….35,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Steps for exchange of similar assets—no cash Remove all items related to the old machine. Record the new machine at the value of the old machine. 1 2

13-29 Machine (new)……………………………….35,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Part (b)—Similar Assets, No Cash Steps for exchange of similar assets—no cash Remove all items related to the old machine. Record the new machine at the value of the old machine. There will be no gain or loss

13-30 Part (c)—Similar Assets, Cash > 25% When similar assets are exchanged and cash involved exceeds 25% of the FMV of the exchange, the new asset is recorded at FMV of the exchange. All gains are entirely recognized (monetary transaction).

13-31 Part (c)—Similar Assets, Cash > 25% When similar assets are exchanged and cash involved exceeds 25% of the FMV of the exchange, the new asset is recorded at FMV of the exchange. All gains are entirely recognized (monetary transaction). FMV of New Asset = FMV of Old Asset + Cash Paid

13-32 When similar assets are exchanged and cash involved exceeds 25% of the FMV of the exchange, the new asset is recorded at FMV of the exchange. All gains are entirely recognized (monetary transaction). FMV of New Asset = FMV of Old Asset + Cash Paid * FMV can be determined by either side of the equation, whichever is most easily (reliably) determinable. Part (c)—Similar Assets, Cash > 25%

13-33 Recognition of Gain on Exchange of Assets Text p. 761

13-34 Text p. 761 Recognition of Gain on Exchange of Assets

13-35 Text p. 761 Recognition of Gain on Exchange of Assets

13-36 Text p. 761 Recognition of Gain on Exchange of Assets

13-37 FMV of New Asset = FMV of Old Asset + Cash Paid Remember this old machine has a book value of $35,000 and a market value of $40,000. Therefore, in a monetary transaction, Coaltown Corp. will realize a $5,000 gain. In this problem, Coaltown will record the new machine at FMV,which is equal to the FMV of the old machine plus the $15,000 paid. Part (c)—Similar Assets, Cash > 25%

13-38 Part (c)—Similar Assets, Cash > 25% Machine (new)……………………………….55,000 Record the new machine at FMV. Steps for exchange of dissimilar assets—Cash > 25% 1

13-39 Part (c)—Similar Assets, Cash > 25% Machine (new)……………………………….55,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Record the new machine at FMV. Remove all items related to the old machine. Steps for exchange of dissimilar assets—Cash > 25% 1 2

13-40 Part (c)—Similar Assets, Cash > 25% Machine (new)……………………………….55,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Cash…………………………………………15,000 Record the new machine at FMV. Remove all items related to the old machine. Record cash paid. Steps for exchange of dissimilar assets—Cash > 25% 1 2 3

13-41 Part (c)—Similar Assets, Cash > 25% Machine (new)……………………………….55,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Cash…………………………………………15,000 Gain on exchange of machinery………….5,000 Record the new machine at FMV. Remove all items related to the old machine. Record cash paid. Record entire gain. Steps for exchange of dissimilar assets—Cash > 25%

13-42 Machine (new)……………………………….55,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Cash…………………………………………15,000 Gain on exchange of machinery………….5,000 Record the new machine at FMV. Remove all items related to the old machine. Record cash paid. Record entire gain. Part (c)—Similar Assets, Cash > 25% Steps for exchange of dissimilar assets—Cash > 25%

13-43 Part (d)—Similar Assets, Cash Paid < 25% When similar assets are exchanged, and cash of less than 25% is paid, the new asset is recorded at the book value of the old asset plus the cash paid. This effectively defers all gains.

13-44 Part (d)—Similar Assets, Cash Paid < 25% When similar assets are exchanged, and cash of less than 25% is paid, the new asset is recorded at the book value of the old asset plus the cash paid. This effectively defers all gains. Since all gains are deferred, any difference between FMV of the new and FMV of the old (plus the cash paid) is ignored.

13-45 Text p. 761 Recognition of Gain on Exchange of Assets

13-46 Part (d)—Similar Assets, Cash Paid < 25% Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Steps for exchange of similar assets—cash paid < 25% Remove all items related to the old machine. 1

13-47 Part (d)—Similar Assets, Cash Paid < 25% Machine (new)……………………………….38,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Cash…………………………………………3,000 Steps for exchange of similar assets—cash paid < 25% Remove all items related to the old machine. Record the new machine at the book value of the old machine plus cash paid. 1 2

13-48 Machine (new)……………………………….38,000 Accumulated Depreciation—Machinery…..17,000 Machinery (old)…………………………….52,000 Cash…………………………………………3,000 Part (d)—Similar Assets, Cash Paid < 25% Steps for exchange of similar assets—cash paid < 25% Remove all items related to the old machine. Record the new machine at the book value of the old machine plus cash paid. There will be no gain or loss

13-49 Part (d)—Similar Assets, Cash Received < 25% When similar assets are exchanged, and cash of less than 25% is received, the new asset is recorded at the book value of the old asset, less the cash received, plus a portion of the gain.

13-50 Part (d)—Similar Assets, Cash Received < 25% When similar assets are exchanged, and cash of less than 25% is received, the new asset is recorded at the book value of the old asset, less the cash received, plus a portion of the gain. The portion of the gain to be recognized is: Cash Received Cash Received + FMV of New Asset Cash Received Recognized Gain =x

13-51 Text p. 761 Recognition of Gain on Exchange of Assets

13-52 Part (d)—Similar Assets, Cash Received < 25% $52,000Cost $42,000– Accumulated Depreciation ?= Book Value $43,000Market Value

13-53 Part (d)—Similar Assets, Cash Received < 25% $52,000Cost $42,000– Accumulated Depreciation $13,000= Book Value $43,000Market Value

13-54 Sales Price (FMV)– Book Value= Gain $43,000 – $13,000= $30,000 Recognize some of the indicated Gain Part (d)—Similar Assets, Cash Received < 25% $52,000Cost $42,000– Accumulated Depreciation $13,000= Book Value $43,000Market Value

13-55 Recognize some of the indicated Gain Part (d)—Similar Assets, Cash Received < 25% Cash Received Cash Received + FMV of New Asset Cash Received Recognized Gain =x

13-56 $3,000 $3,000 + $40,000 x $30,000 = $2,093 Recognized gain: Part (d)—Similar Assets, Cash Received < 25% Recognize some of the indicated Gain Cash Received Cash Received + FMV of New Asset Cash Received Recognized Gain =x

13-57 Part (d)—Similar Assets, Cash Received < 25% $13,000Book Value of Old Machine $ 3,000– Cash Received $ 2,093+ Portion of Gain Recognized $12,093= Book Value of New Machine

13-58 Part (d)—Similar Assets, Cash Received < 25% Accumulated Depreciation—Machinery…..42,000 Machinery (old)…………………………….55,000 Remove all items related to the old machine. Steps for exchange of similar assets—cash received < 25% 1

13-59 Part (d)—Similar Assets, Cash Received < 25% Machinery (new).…………………………….12,093 Accumulated Depreciation—Machinery…..42,000 Machinery (old)…………………………….55,000 Remove all items related to the old machine. Record the new machine at the book value of the old machine less the cash received, plus a portion of the gain. Steps for exchange of similar assets—cash received < 25% 1 2

13-60 Part (d)—Similar Assets, Cash Received < 25% Machinery (new).…………………………….12,093 Accumulated Depreciation—Machinery…..42,000 Cash…………………………………………..3,000 Machinery (old)…………………………….55,000 Gain on exchange of machinery………….2,093 Remove all items related to the old machine. Record the new machine at the book value of the old machine less the cash received, plus a portion of the gain. Record the cash received and the portion of the gain. Steps for exchange of similar assets—cash received < 25% 1 2 3

13-61 Part (d)—Similar Assets, Cash Received < 25% Machinery (new).…………………………….12,093 Accumulated Depreciation—Machinery…..42,000 Cash…………………………………………..3,000 Machinery (old)…………………………….55,000 Gain on exchange of machinery………….2,093 Remove all items related to the old machine. Record the new machine at the book value of the old machine less the cash received, plus a portion of the gain. Record the cash received and the portion of the gain. Steps for exchange of similar assets—cash received < 25% 1 2 3

13-62 End of Problem