Property Plant And Equipment Nonmonetary Exchange (Gain On Trade In Of Equipment) [MUSIC PLAYING] - Here we're going to be going through an example of a non-monetary exchange of some property, plant, and equipment for long-term assets here. And our example is going to be where a company is going to trade in an old machine here for a new machine. And it's going to involve some cash as well here. First thing we have to look at is our rules here on these exchanges of non-monetary assets here. And you've got to go through these steps here when you're dealing with these problems. Number one, you have to compute if there's any total gain or loss of the asset given up. And it's fair value here less the book value determines if there's any gain or loss. In our example here, we're going to have a gain here on this exchange here. And number two here-- if there's any loss, you recognize the entire loss immediately here. In number three, if there's any gain, then you have to determine if there's any commercial substance here, or if there isn't any commercial substance. And in our case, we're going to be dealing with both of these cases here. So what we mean by commercial substance here-- let's just go down and look at it. That's if the exchange has commercial substance if future cash flows change the economic position here. And we're going to look at both cases here. So first, again, we're going to be looking here at the case where we got commercial substance, and then looking at where there isn't any commercial substance here, then we'd have to step through these other procedures here. No cash involved, no gain. Some cash given up, no gain. And this is going to be the case here, where some cash is going to be given up. But there is going to be gain here, because we have a rule or a regulation here that overrides that. If the cash exchange is greater than 25 percent of the fair value of the exchange, then you recognize the entire gain. And that's what we're going to be looking at in this problem. So let's go and look at our problem itself here. So corporation A purchases a new machine by trading in its old machine and paying the balance in cash. And the following relates to this purchase here. So we're going to have the list price of the new machine. That isn't going to come into play in this example. Then there's going to be the cash paid here, the cost of the old machine here that's sitting on the books, and then the accumulated depreciation of the old machine here. And then this is key here, the market value of this old machine. And that's-- actually, it's fair value here. So let's first look at the case here we have the exchange has commercial substance here. And the point is, just look at the definitions here and how we make these calculations. So that's the important thing here. So first, the book value of the old machine. That's the cost of the old machine that's sitting on the books here, less any accumulated depreciation of the old machine here. And that gives you the cost here less the accumulated depreciation. That's the book value of the old machine in this case, $9,400. Now, to determine any gain on our disposal, well, we take the fair value of the old machine. That was its market value up here. Let's just go look at that, our market value here, $10,400. That's the fair value of the old machine here. And then subtract out the book value of the old machine here. Remember, we calculated that up here. And the difference gives us a total gain on the disposal. On this case, we have a gain here of $1,000 on this exchange, or the disposal here of this old machine for the new one. Now let's look at how we calculate the cost of the new machine. Well, the cash paid-- we paid $20,000 on this exchange. We have to pay extra $20,000 plus the trade-in. Then we take the fair value of the old machine. Remember, that was $10,400 up here. And that was the market value here of the old machine. And then adding those two together, we come up with the cost of the new machine here, $30,400. So now we have to deal with making the recording here, recording the journal entries for this transaction. First let's say we would debit or increase our new machine account here for $30,400. And that was the cost of the new machine here. Then we would be removing our old machine off the books, so we would be debited our accumulated depreciation here for the old machine here, and then we would be crediting or removing the old machine at its cost here of $25,400 off the books here. But now this is where we recognize the gain here on our disposal. So we had the gain, remember? We calculated that up here to be $1,000. So the gain on our disposal, that would be going to our income statement here. So we credit that for $1,000. And then the balance amount here has to go through the cash paid. That was the cash that was paid out. So we'd be reducing our cash here by $20,000 for this trade-in here. Now let's look at the case here where the exchange lacks commercial substance. And remember, we talked about that. So if there is no commercial substance-- and there was, in this case, some cash given here-- we would normally not recognize any gain. There wouldn't be any gain here. But we have this overriding rule here-- the gain in this case is not deferred because the cash, the boot, is greater than 25 percent of the fair value of the exchange. Remember, we went through that rule here on our exchange rules here for these non-monetary assets. So the cash in this case, $20,000, that was the cash that was paid or given here in this. Divide that by the fair value of the exchange. That was $30,400. That's the value of our new machine here, the fair value of the exchange here. And the fractional, or dividing those out here, you come up with 66 percent. So the cash exchanged here was 66 percent of the fair value of the exchange. So in this case, since it's greater than 25 percent of the fair value, you'll recognize the entire gain here of $1,000. So in the case here where the exchange did lack commercial substance, we still recognized the gain, only because our cash amount paid out was greater than 25 percent here of the fair value. Now let's look at the situation here, just to go over it real briefly. If the gain is deferred-- say we actually deferred this gain-- this is what we would have, the calculation we'd have to make here. So the cost of the new machine here-- again, that was $30,400 that we calculated. But we would be subtracting out the gain deferred here. We wouldn't have recognized the gain here of $1,000. So the difference here gives us the basis of the new machine here. In this case, 30,400 less the $1,000 gain here gives us the basis of the new machine here at $29,400. So I just wanted to go through this in case you were wondering here about how we'd handle it if the gain was deferred. Not going through the journal entries here. But then let's just go back here and look at it one more time here. Here's your book value of the old machine. You can look at that here. The gain on the disposal here, and then the cost of the new machine. So these are the three items that you'd have to calculate out here. And then using your calculations here, then you can make your journal entries here. So that takes care of the problem here where we had corporation A purchase the new machine here by trading in its old machine, and then they also had to pay some cash, or boot, on this trade-in.