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F2 Nonmonetary exchange question! two becker answers contradict each other

nonmonetary exchange nonmonetary asset lacking commercial substance boot received

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#1 rukiddenmeh



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Posted 24 September 2013 - 09:26 PM

On January 2, Elbert's Delivery Company and Wanda's Exporters exchanged similar delivery trucks in an exchange that lacks commercial substance. Data relative to the trucks follow:


Elbert's truck

Original cost:                                            $10,000

Accumulated depreciation as of January 2:     8,000

Fair market value                                          3,000


Wanda's truck

Book value                                                $15,000


In the exchange, Elbert paid Wanda cash of $10,000. Elbert's Delivery Company should record the new truck at:

a. 13,000
b. 10,000
c. 12,000
d. 8,000


BECKER ANSWER: Choice "a" is correct. The new truck is recorded at $13,000 on Elbert's books. In this case, the transaction is considered to be a monetary exchange, because the boot ($10,000) exceeds 25% of the total consideration ($10,000 plus $3,000 fair value of the old truck transferred to Wanda). Therefore, both parties to the exchange recognize all gains and losses on the transaction.


I thought the correct answer was c. 12,000 since this is lacking substance and Elbert PAID the boot, not received it.. Because the question specifies what would be on Elbert's books and not Wanda's, I thought the "Boot is 25% or more of total consideration" rule applied to only BOOT RECEIVED by ELBERT, not boot paid? 


I found this SAME becker question from 2006, and the answer said c) 12,000.. because boot was paid, you would NOT recognize the 1,000 gain so the new asset's basis is equal to the $2,000 basis of the old asset plus the $10,000 cash paid.

#2 rukiddenmeh



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Posted 24 September 2013 - 09:38 PM

For the 25% OR MORE rule, are you supposed to look at all nonmonetary exchanges with ANY BOOT received/paid from both parties' perspectives to see if they are >=25% of total consideration, even if the question specifies one party's books?


So, for whenever you see a nonmonetary exchange lacking substance with boot being paid by one party, I guess you can't just assume there's no gain recognized. that's how i've been answering the other multiple choice questions.. If I saw boot PAID, I just put $0 for the amount of gain recognized.. But now, I guess you have to apply the 25% rule to everything?

#3 David



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Posted 27 September 2013 - 03:18 AM

I do believe that is a mistake on Becker's part and that your initial reasoning is correct.


Since Elbert pays boot in this nonmonetary exchange Elbert cannot recognize any gain, and thus the carrying value of the new truck cannot be $13,000.


I believe the correct J/E should be:


Dr:    Truck - new   12,000

Cr:     Truck - old      2,000 (NBV 10,000-8,000)

Cr:     Cash              10,000


I hope this helps!

#4 MartinC



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Posted 27 September 2013 - 11:05 AM

I believe the answer to be 13,000 because the total cash received by Wanda is over 25% of the total consideration. I understand that we are doing the entries for Elbert but in the event that one party receives cash in excess of 25% of the total consdieration (in a nonmonteary exchange lacking commerical substance), BOTH parties recognize the exchange as as a monetary exhange, thereby recognizing gains on both sides of the transaction. In application to the 25% or greater rule, Wanda recieved boot in excess of 25% thereby forcing both Wanda and Elbert to recognize the transacation as a monetary exchange.


Hope this helps!

#5 bella.dreamer


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Posted 26 November 2013 - 03:21 AM

Yes it is a mistake. Supposed to be $12,000.