Sample Case Study Paper on Nonmonetary Exchange

Nonmonetary Exchange

Case 1

Loss situation, fair market value given is known, boot is given, no boot is received and the transaction has commercial substance

            The cases involving loss situations are those whose fair value of the asset exceeds the book value. In the current situation, the transaction involves boot which is given but not received yet. According to the United States GAAPs, this amount must not exceed 25% of the fair market value.  The transaction has commercial substance thus the boot amount must be included in the fair market value of the asset in question. The above case may be presented by the scenario below.

            A company exchanges processing machine with a fair value of $5,000. This includes $9,000 cost and $2,000 accumulated depreciation. The boot given is $500 for the land which the equipment is traded for.  The value of land changes to include the fair market value and the boot, that is, $5,500. The book value of the machine is $ 7,000 ($9,000-$2,000), leading to a loss situation of $2,000. On the debit side, the transactions recorded are the loss, accumulated depreciation and land.  The boot amount and the cost of machine are credited.

Case 2

Loss situation, fair market value given is known, boot is given, no boot is received and the transaction does not have commercial substance

            The case is similar to the first one except that it involves a transaction whose material substance does not matter. In this case, the commercial substance of the transaction is insignificant because the future cash flows are unlikely to change. This implies that the boot amount is not reflected in the fair market value of the assets. The following is an example of such a scenario.

            A company exchanges processing machine with a fair value of $5,000. This includes $9,000 cost and $2,000 accumulated depreciation. The boot given is $500 for the land which the equipment is traded for.  The value of land remains as $5,000 because the boot value is not included. The book value of the machine is $7,000 ($9,000-$2,000), leading to a loss situation of $2,000. On the debit side the transactions recorded are the loss, accumulated depreciation and land.  The cost of machine is credited.

Case 3

Loss situation, fair market value given is known, no boot is given, no boot is received and the transaction has commercial substance

            The scenario is similar to the second case except that the boot is not given, and the transaction has commercial substance. This implies that there is no exchange of cash in the transactions. Again, the future cash flows of the transactions are expected to either increase or reduce, thus the commercial substance. The following scenario explains the transactions.

            A company trades manufacturing equipment with a fair value of $5,000 for land worth the same amount. The fair value includes the cost of the machine $10,000 and the accumulated depreciation of $2,000. This implies that the book value is $ 8,000. With a fair value of $5,000, the loss situation is $3,000.  On the debit side, the transactions involved are the cost of land, accumulated depreciation and the loss. The cost of the manufacturing machine is credited, that is, $10,000.

Case 4

Gain situation, fair market value given is unknown, fair market value received is known, no boot is given, no boot is received and the transaction has commercial substance

             A gain situation is determined by the amount of fair market value relative to the carrying amount of the assets. It occurs when the carrying amount is less than the fair market value. A gain transaction that has commercial substance is one that is expected to lead to higher or lower cash flows in future relative to the current status. In the above transaction, the fair market value of one asset is unknown. According to the United States GAAPs, the unknown fair value should be equated with the fair market value of the received asset. The following is an example of the transactions in such a case.

            A company trades a machine with a building. The value of the machine is $5,000 but the value the building is unknown. The accumulated depreciation for the machine is $2,000 and its cost is 10,000. This implies that the book value of the machine is $8,000 and the fair market value is $ 5,000, implying a gain of $3,000. The value of land is thus $5,000. The gain and the fair market value of the machine are credited while land and accumulated depreciation are debited.