Question

Beerbo Inc. traded a used truck for a small computer. Before this exchange of non-monetary assets (ENMA), Beerbo's balance sheet show the used truck at a cost of $20,000 with an accumulated depreciation balance of $18,000. The fair value of the small computer was $3,300. Beerbo also paid $500 in the transaction.

Assume the ENMA lacks commercial substance.

How much gain (loss) must Beerbo record from in this transaction? Input gains as positive numbers, losses as negative numbers (gains = 123; losses = -123).

Answer 1

Let us first understand the terms exchange of non-monetary asset and commercial substance,

1. Exchange of non-monetary asset is nothing but when we sell our old asset but didn't receive cash in exchange but some other asset in place of cash will be called as ENMA.
2. In the above said transaction, if the cash flows into the entity changes because of the new asset then there is said to be a commercial substance, that is indirectly it is a value addition.

In our question, the exchange is a ENMA and there is no commercial substance, the new asset is to be valued at the book value of old asset + any cash paid. That means the new asset is to be valued at,

• Cost of truck = 20,000
• - accumulated depreciation = 18,000
• + Cash paid = 500
• Computer to be valued at 2,500.

As it is clear that from the above we can conclude there is no gain or loss to be recognised by Beerbo Inc.