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 |
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorJanuary 8th, 2024
The financial accounting term additional paid-in capital refers to the amount paid in excess of par value by investors when capital stock is first issued. There are a number of subsequent transactions that can also affect the balance of this account. Additional paid-in capital appears in the owner's equity section of the company's balance sheet.Moneyzine EditorJanuary 4th, 2024
The term acquiring assets with stock is used to describe the purchase of assets such as plant, property and equipment by a company through the issuance of securities. In order to value the assets purchased, accountants will use either the market value of the securities, or the appraised value of the asset acquired.Moneyzine EditorJanuary 4th, 2024- The financial accounting term nonreciprocal transfers refers to the disposition or acquisition of an asset through a donation or a gift. Companies can both donate property as well as receive gifts of property. These are referred to as nonreciprocal transfers because the transaction occurs in one direction.Moneyzine EditorSeptember 20th, 2023
