Exchanges of Plant, Property, and Equipment Definition The financial accounting term exchanges of plant, property, and equipment refers to the process of valuing nonmonetary assets that have been transferred between two companies. When this type of exchange occurs, accountants can choose from several approaches to valuing the property involved in the transaction, including using fair market value or book value. Explanation When companies exchange nonmonetary assets, accountants have the option of recording the transaction in one of several ways: Fair Market Value: This can include either the value of the asset that was given up or received. Typically accountants will use the fair market value that is thought to be more accurately known. The company would then be able to determine, and record, a gain or loss on the exchange. Book Value: If the fair market value of the assets exchanged cannot be reasonably determined, the book value of the assets is used to determine if the transaction results in a gain or loss. Companies can exchange similar assets (building for building) or dissimilar ones (inventory for production equipment). Recognizing the gain or loss on the exchange will depend on the types of assets involved. Dissimilar Assets : If the nonmonetary assets are dissimilar, companies should book the gain or loss on the transaction once the agreement is finalized. Similar Assets : If the assets are similar, companies should book the loss on the transaction once the agreement is finalized. However, if the exchange results in a gain, and the earnings process is not complete, the gain should be deferred. When exchanging nonmonetary assets, there is oftentimes the payment of boot as part of the transaction. Boot is a monetary consideration for the difference between the fair market value of the assets exchanged. When boot is received, a partial gain on the transaction should be booked. The above rules can be summarized in the following manner: Losses are always recognized once the transaction is finalized. Gains are recognized immediately if a nonmonetary exchange involves dissimilar assets. Gains are deferred until the earnings cycle is complete if the exchange involves similar assets. Example Company A has entered into an agreement with Company XYZ to exchange a widget maker for 12 transformers plus $6,000. The widget maker has a book value of $80,000 and a fair market value of $90,000. The cost of the 12 transformers would be calculated as: Cost of Twelve Transformers Fair Market Value of Widget Maker Exchanged $90,000 Cash $6,000 Cost of Twelve Transformers $96,000 The gain on the sale of the widget maker would be calculated as: Fair Market Value of Widget Maker Exchanged $90,000 Cost of Widget Maker $100,000 Accumulated Depreciation $20,000 Book Value of Widget Maker $80,000 Gain on Sale of Widget Maker $10,000 Finally, the journal entries to record the transaction would include: Debit Credit Transformers $96,000 Widget Maker $100,000 Accumulated Depreciation $20,000 Cash $6,000 Gain on Sale of Widget Maker $10,000
Posted on: Thu, 20 Nov 2014 09:32:00 +0000
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