 Hello, and welcome to the session in which we would look at exchanges of non-monetary assets. This topic is covered on the CPA exam, as well as in your accounting courses. If you're studying for the CPA exam, I strongly suggest you check out my website, farhat-lectures.com. On my website, you will find additional information, whether it's multiple choice through false CPA questions or notes, that's going to supplement not to replace if you have Wiley, Glyme, Roger or Becker. Keep your courses. I don't supplement them. I can add 10 to 15 points. Now, how do I do that? If you understand the material better, and that's what I do, I teach the material versus those courses, they review the material. They assume you know the material. I don't assume anything. I assume you know nothing, and I will start from scratch, and I will build that knowledge. Once you build that knowledge, you would use your CPA course to really, really, really do very well on the CPA exam. And this is how I can increase your score. Also, if you're taking other accounting courses, including intermediate accounting, check out my website for additional resources. Connect with me on LinkedIn and check out my LinkedIn recommendations. Like my lectures, share it. It doesn't cost you anything. If my lectures are helping you by sharing with others, you'll be helping others as well. Connect with me on Facebook and Instagram. So let's talk about what is exchanges of non-monetary assets. What we are exchanging is assets that's non-monetary in nature. What is non-monetary? It means no money. No money is involved. Or we're going to find out if there is money, it's a small amount of money. Or what does that mean? It means basically we are exchanging maybe a truck or another truck. It doesn't have to be truck for a truck. It could be two cars for a van or some other asset land for a building. So one asset versus another. And those assets are non-monetary in nature. So there are special rules that we need to learn about when it comes to these assets. The first rule we need to know is this. Ordinarily, accounted for on the basis of what? So when we account for these transactions, well, what we're going to be looking at first is the fair value of the asset that we are given up. So the fair value of the asset given up. So this is the first thing we do. What does that mean? It means if we know how much we are given up, we record the new asset because you're exchanging an old one for a new one. Record the new asset at the fair value of the asset given up. How much assets did you gave up? That's how you would record the asset. You don't know this information. If this information is unknown, so you don't know the fair value of the asset given up. If that's not known, we go to number two. Then we use the fair value, hopefully, of the asset received. Hopefully, we know this. Hopefully, we know the fair value of the asset received. If that's the case, you would record the new asset based on the fair value of the asset received. So first, then second. Most of the time, you're going to know what's the fair value of the asset you're given up most of the time. Especially if it involves a little bit of cash and some asset, you know what's the fair value of that asset. So that's how much this is the general rule. What else do we need to know? We need to know that companies should recognize, it means record. Recognize means record. Immediately, any gain or losses. So we're going to have gains and losses when we do exchanges. When the transaction has a commercial substance. So this is an important term we need to learn about because what is commercial substance? So what we're saying is if the transaction has a commercial substance, recognize both gains and losses. Now we need to define commercial substance. So let's go to the textbook and let's look at what commercial substance. An exchange has a commercial substance if the future cash flow as a result of the transaction changes. So if there is a change in the cash flow as a result of this transaction, if there's a change in the cash flow, then guess what? We assume that this transaction has a commercial substance. What does that mean? If the cash flow changes? That means the two parties of the transaction, both parties of the transaction, economic position, both of the economic position changed as the result of the transaction because the assumption here is this. When you go into, when you are undertaken an economic transaction, the reason you are undertaken this economic transaction because it's going to improve your position. So no one will go, will undertake a transaction. If their economic position, it's not going not only change, but improve. So the assumption here if it has economic transaction. So let's take a look at an example a little bit further to explain this. So let's assume Andrew company exchanged some of its equipment for land held by Rodik Inc. It's likely that the timing and the amount of the cash flow rising from the land will differ significantly from that of the equipment. So here what's happening is we are exchanging land. We are exchanging land, land for equipment. Okay. And what we are saying because of this transaction, the cash flow will change. Well, if the cash flow is going to change the timing of the cash flow or the amount of the cash flow or the risk. So either the timing amount or risk. So are we receiving it sooner than before later than before? Do we have more risk because of this transaction is the amount that we're going to be receiving more or less any change in those? It means the transaction has an economic commercial substance. Okay. So we're saying as a result, both Andrew and Rodik are in different economic position. Therefore, this is a commercial substance transaction. Now bear in mind here we are exchanging land for equipment. It doesn't have to be land for equipment or equipment for land. What if the company exchanged similar assets such as truck for another truck? Does that disqualify from commercial substance? Not necessary. Even if the exchange of similar asset, a change in economic position of the company can result. What does that mean? Let's assume the useful life of the truck received is significantly longer than the truck given up. Well, the timing has changed. We're going to be receiving more cash because the life of the truck is longer. So the cash flow for the trucks can differ significantly. Well, once they differ, what do we have? We have commercial substance. So the transaction has a commercial substance. Now, however, it is possible that the exchange of similar asset does not have difference in the cash flow. So we may exchange similar asset, but what does not have significant difference in cash flow? Well, the company in the same economic position as before. So both companies are in the same economic position. In this situation, we say that the transaction lacks commercial substance. So here, this is the definition of lacks commercial substance. It doesn't have commercial substance. What does that mean? Well, it means you still recognize the losses, but you have to defer the gain. And we'll talk about the rules later on. But this is what it means to know if the transaction has commercial substance or lacks commercial substance. Because once I use this term in the future, I'm going to assume that you know what does it mean. So meaning of commercial substance, exchange has commercial substance if the future cash flow changes as a result of the transaction. If the two parties position changes, the economic has commercial substance. Now, what does that mean for us? Here are the rules. If the transaction, if the exchange has commercial substance, then yes, we recognize gains and losses immediately. That's what it means. So it's easy. We book both the gain and the losses. If the exchange, so this is one, could be scenario one, scenario two. If the exchange lacks commercial substance and no cash is received. Now here we could have cash. Here we could have cash. Okay. It doesn't really matter. Here we could have cash, some cash. But here if the exchange lacks commercial substance and no cash is received and there is no cash. What do we have to do? We have to, for the gain, we have to defer the gain. We have to defer the gain. And we'll see what does it mean, defer the gain. It means you will take the gain later. You're going to add it to the cost. But you recognize the loss immediately. So if it has commercial substance or does not have commercial substance, you recognize the loss. It makes the difference with the gain and when there is no cash. What, what if we have, what we have lack of commercial substance, now cash received? Well now, although they lack commercial substance, but the two parties are serious. How do we know that they're serious? This is not shuffling papers just to recognize gains and losses for book purposes because they exchange cash. How much cash do they have to exchange? If the cash is 25% or more of the fair value of the exchange. So we have to have a 25, there is a limit. The cash has to be 25% or more. Recognize the entire gain because earning process is complete. So of the, if they're exchanging 25% or more cash of the fair value of the exchange, what we're saying here then this is, this is a real transaction. If it's less, then we're going to recognize partial gain. And guess what, with losses, we always recognize the losses. If it has commercial substance, does not have commercial substance, cash received, no cash received, always recognize the losses. The gains only when there's a commercial substance and if it lacks commercial substance, but the cash is 25% or more of the value of the exchange. Otherwise we defer the cash, we defer the gain if it lacks commercial substance. If it lacks commercial substance, but we received some cash less than 25, we're going to recognize partial gain. So make sure you know those rules. We're going to work examples, but you have to kind of basically memorize them before the test. So again, exchange loss situation. If it's loss, you recognize the loss immediately, whether the exchange lacks commercial substance or not. What's the rationale behind this? One of the concepts behind this is conservatism, because if you have a loss, recognize the loss immediately. So basically understate, don't overstate your asset or your gains. Companies should not value asset at more than their cash equivalent price, because if we have a loss, if we defer the loss, it means the cost of our asset is going up. So if we don't recognize the loss, what do we have to do? If we're going to defer the loss, if we are, which we don't, if we are going to defer the loss, the loss gets added to the cost of the asset, because if we defer it, we're going to tap it on the asset, and you're going to see how, and it's going to increase the cost of the asset. Well, we cannot overstate assets, and that's the thing, that's the rule of conservatism. You cannot overstate asset. But what happened, let me just put this note here. If we defer the gain, if we defer the gain, what's going to happen, you will see later on, the cost of the asset will go down. The gain will reduce the cost of the asset. That's why we can defer the gain, but we cannot defer the cost, because it's going to increase the cost of the asset. So this is deferring gain, this is gain not losses, this part right here. So please don't mix the two. So let's take a look at this example, and let's take a look at these rules. This example to learn some of the rules. Information processing, trades, it's used machine for a new model at Jared business solution. Okay, so we have an exchange. Does it have a commercial substance? Yes, the exchange has a commercial substance. Now, few things I did not clarify, maybe I need to clarify before we work this example. One of the rules is this. How do we, how do we determine if we have a gain or a loss? Because I did not, I assume that you know the rules, but that's not, that's not assume anything. What we do is we look at the fair value, fair value of asset given up versus the book value. So the fair value asset given up. So we look at the fair value of the asset given up versus the book value. And let's see how do we determine this. If the fair value of the asset given up, if the fair value is a greater, fair value is greater than the book value. So this is FV and this is BV. If the fair value is greater, then we're going to recognize a gain. Okay, the fair value is greater. If the fair value is lower than the book value, we're going to recognize a loss. Oops, loss. We're going to recognize a loss. Now, I did not define what book value is. What is book value? The book value is the cost of asset minus its accumulated depreciation. So the book value equal the cost of the asset minus accumulated depreciation. So if the book value is not given, you need to know how to come up with the book value. Okay, because sometimes it's not given. So they will tell you the cost is that much accumulated. They will tell you the cost is 100,000. Accumulated depreciation is 40,000. Oops, that's, I don't think I can go back there. Let me just, so if they told you cost is, let's assume they said cost is 100,000 and accumulated depreciation is 40,000. Well, guess what? 100,000 minus 40,000 is the book value because sometimes they may not give you the book value of the asset. Now, they're telling you the fair value of the asset, the fair value of the asset equal to 80,000. Well, if the fair value is 80,000, the fair value is greater than the book value. So the fair value is 80,000 and you should be given the fair value, the greater than the book value, then you would record a gain. And hopefully, you know that gain will be recorded by a credit, not a debit. If the fair value of this asset is 50,000, now here the fair value is 50, which is less than 60, less than the book value. Then you have a loss and hopefully, you know, we record a loss by a debit. We record a loss by a debit. This is the loss. This is a gain of 20,000 and this is a loss of 10,000. You cannot have a gain and a loss at the same time. Those are two different scenarios. But because I assume that you know how to calculate the gain or a loss, maybe I should not assume this. This is how we calculate the gain or the loss. Back to this example, the used machine has a book value of 8,000. So here the book value is given. Well, they're also given us that the cost is 12 and the accumulated depreciation is 4. So they're giving us everything. They're giving us the book value, the original cost, and accumulated depreciation. Here the fair value of the asset is 6,000. Well, hold on a second. Book value is 8, but fair value is 6. So the book value is less, I'm sorry, is greater than the fair value. Or fair value, if you look at it from the other way, fair value is less than the book value. What do we have? We have a loss of how much? What's the loss? The loss is 2,000 because the fair value is less. Okay. The new model lists for 16,000. So we want to exchange this new model. It's list for 16,000. Well, that's irrelevant to us because until we finish the transaction, see how much we really paid for this. Jared, the seller, gives the party that's trading the new asset, gives information processing, gives us, we have the old asset, a trade allowance for 9. It doesn't matter if they give us trade allowance for 9. Don't think because they give us a trade allowance for 9, we have a gain. Okay. Some students think, well, I have a trade allowance of 9. It doesn't matter what they did. They must have inflated their list price because they inflated their list price. They can give you a higher fair value, but you know what your fair value is. You don't let them decide what your fair value. Okay. So don't let that confuses you. Okay. So how do we record the cost of the asset? We already figure out the loss is 2,000. How do we record the cost? Well, the cost of the new asset. What is the general rule? The general rule is you record the cost at the fair value of the asset you gave up. What did you gave up? Well, think about it. You gave up the old asset, which is equal to 6,000. As far as you're concerned, equal to 6,000. Okay. Now, obviously you paid something. How much cash did you have to pay? Okay. So the list price is 16. So we want to find out how much cash did you have to pay? They said, well, we're going to give you a trade for 9. So what you're left with is the list price is 16. They gave you a trade-in allowance for 9. So they told you to pay 7,000. So you had to pay $7,000 cash, plus you gave up an old machine with the fair value of 6. So what you gave up is 13,000. So you gave up the old asset, plus you gave up cash of 7,000. So the cost of the new machine is 13,000. Here they're not telling you how much cash you paid, but we're able to back into it. Well, if they gave you, if they said it's 16, they're telling you the old asset, it's going to be considered 9, what you left with is 7. But you don't care about the 9, because once again, they could have inflated this trade because they inflated this price here. So the true cost of this asset, as far as we're concerned, when we debit this asset, we debit it at 13,000. And when we calculate the loss, I just did the loss for you, the loss is 2,000. So what is the entry? What is the entry? Well, we're going to book the asset as 13,000. Why is it 13,000 once again? The 6,000 fair value old asset, plus $7,000 cash. Those two together equal to the 13,000. What else do we have to do if we are getting root of the old asset? We have to credit the old asset and debit accumulated depreciation. So we have to credit the old asset. We have to credit the old asset because if you're getting root of the old asset, you have to credit the old asset. You can no longer keep it on your books. And the asset has a cost of 12 and accumulated depreciation of 4. That entry you cannot run away from. If you're giving up the asset, you have to get root of it. And don't forget to get root of its accumulated depreciation because those two accounts go hand in hand. If you are getting root of an asset, you have to get root of its accumulated depreciation. Now we already recognize the loss. The loss is a debit of 2,000. We have to record the loss. The loss has a debit of 2,000. And what else does this balance? It doesn't because we also paid cash. So we credit cash of 7,000. And because this transact, well, it doesn't matter. This is a loss. You always recognize the loss. It doesn't matter if it lacks commercial substance or does not lack commercial substance. So this transaction, if they told you it lacks commercial substance, the entry would be the same. Why? Because we had a loss. And for a loss, you will always recognize the loss if it has commercial substance or if it doesn't have commercial substance. Good. All right. Exchange gain situation and has commercial substance. Once again, once you see exchange and commercial substance, usually record the cost of non-monetary asset in exchange for the fair value of the asset given up. That's the general rule. And immediately recognize the gain. So once again, if it has commercial substance and you have a gain, you recognize the gain. Let's look at this example. Interstate transportation exchange a number of use truck plus cash for a semi truck. So they exchange some used truck, few of them, plus some cash for a semi truck. The use truck has a combined book value of 42. So they're telling us the book value, which is a cost of 64 less 22 of accumulated depreciation. Now we need to know their fair value. Interstate purchasing agent experience in the second hand market indicates that the used trucks has a fair value of 49. Well, we have everything that we need. In addition to the trucks interstate must pay $11,000 in cash for the semi truck. So what is the cost of this new semi truck? What is the cost is what we gave up? What we gave up is two things. We gave up the old trucks. We paid $11,000 in cash and we gave up trucks that are worth $49,000. So the cost is those two combined, which is 60,000. So in the entry you debit the new semi truck at 60,000. So how much do you record it at? The fair value of the asset given up. We're giving up fair value of the trucks plus the cash. Now we need to know if it's a gain or a loss. How do we determine if we're going to recognize a gain or a loss? But before we do this, let's start to put this entry together. So let's try to put this entry together. So the truck is going to be recorded at 60,000. So the new asset, I'm just going to call it the new asset, which is the semi truck. The new asset will be recorded at, what did we say, 60,000? 60,000. So this is the debit and this is the credit column. Oops, credit. So we're going to debit the asset 60,000. Now what else do we have to do? Once we got rid of the old trucks, we have to credit the cost of the old truck, 60,000, and it's accumulated depreciation. We have to credit the old truck and accumulated depreciation of 22. So we're going to credit the old assets, there are a bunch of assets, for how much, for 64 and 22 depreciation. We're going to credit this for 64 to get rid of the old truck and debit. Well, the debit should come first, but that's okay. Debit accumulated depreciation of not 22, 42. Not 42, 22. So this entry, those two, to remove old truck. That's good. Also I believe we paid cash, so we're going to credit cash of 11,000. What's left in this transaction is to determine if we have a gain or a loss. For one thing, this does not balance. So 60,000 plus 22 does not equal to 64 plus 11, so it does not balance. I'm either missing a gain or a loss. How do I determine if I have a gain or a loss? What is the rule? The rule is you compare the fair value of the asset given up to the book value. The fair value is 49,000 and the book value was given. The book value is 42, which is given to us. The fair value is greater than 42, therefore we have a gain of 7,000. And always a gain is a credit. So when we record the gain, we record it by a credit. We record the gain of 7,000. Now if you want to double check your math, make sure you add everything up. 60 plus 22, this is 82,000. Hopefully this will add up. 7 plus 64 is 71 plus 11 is 82. So total debits equal total credits, everything matches. So this is how we record this transaction. And again, this transaction has a commercial substance, then we can recognize the gain. And this is the entry right here. This is what I just did. And this is how we came up with the gain. Now, what happened if we have a gain? Transaction lacks commercial substance and no cash is received. Under those circumstances, we defer the third gain. Basically push the gain into the future by how? By lowering the cost of the new asset. So if we have a gain, we cannot recognize the gain. So the gain of 7,000 that we recognize earlier that we just did. Let me go back to the previous slide. So you see that gain right here? We're going to be assuming that this transaction, we're going to assume it lacks commercial substance. If it lacks commercial substance, we cannot recognize the gain. So what's going to happen to the gain? We defer the gain and reduce the cost of the new truck. Okay, so this is how we defer the gain. Why? What does it mean we're reducing? So the cost of the truck instead of 60, it's going to be minus 7. It's going to be 53. So this will be gone. And the cost will be 53. So we'll debit the truck for 53, debit the cumulative depreciation, credit the truck, credit the cash. What do we mean by deferring the gain? Down the road, when we get rid of this truck, the new truck, the cost is lower. So the gain will recapture the gain. This is what we mean by deferring the gain. It means we lower the cost now down the road when we trade or sell this truck because the cost is lower, the gain will be higher and the gain will be recaptured. So we defer the gain. Okay? So here we can do it in two ways. We can say, well, the fair value of the truck, the semi-truck is 60,000. This is what we calculated earlier, minus the gain. Or another way to calculate this, another way, this is called the book value method. We'll look at the book value. We use the book value. In other words, we use the book value rather than the fair value plus the cash paid. Plus the cash paid gives us 53,000. So those are two methods. This is called the book value method. Book value method. So if it lacks commercial substance, you could use this method or you could stick with this method and basically calculate the gain, then reduce the gain. It's up to you how you would like to do it. But basically, this is the entry. If the transaction lacks commercial substance, and remember, no cash is received. We did not receive any cash. So it's 100% lacking of commercial substance. Now, this scenario, we're going to have a gain situation. It lacks commercial substance, but some cash is received. When a company received some cash, it's referred to as a boot. It may immediately recognize a portion of the gain. So we're going to have to find out. The general formula for the gain recognition, when an exchange includes some of the cash, is as follows. So how do we figure out how much gain to recognize? We're going to take the cash received, which is called the boot, the cash received, divided by the cash received, plus the fair value of the other asset received, multiplied by the gain. So we want to know what portion of the transaction is cash. What portion of the transaction is cash? So let's take a look at an example, because that's the best way to learn this. So we have this corporation traded in a used machinery with a book value of 60,000. So the book value is 60. Cost is 110. Less circular depreciation, 110 minus 50 is 60,000. And a fair value of 100,000. Well, the fair value is greater than the book value. We have a $40,000 of gain. Here we go. 100 minus 40. It receives an exchange in machine with a fair value of 90,000 plus we received cash. Now we received boot. Okay? It lacks commercial substance, but we received cash. What does that mean? It means we have to do a quick calculation to find out how much of this gain we are going to recognize and whatever we don't recognize, what do we do with it? If it's not recognizable, we defer. We defer. So we're going to use the formula that I just showed you earlier right here. So copy the formula down if you're going to attempt this. Stop the recording. Copy the formula and see if we could see if you could calculate how much gain to recognize. Let's work with this. So 10,000 is the cash received divided by cash received plus fair value. Okay? So basically what we are saying here is 10,000 divided by 100,000, which is 10%, which is this whole thing equal to 10%. So we're going to recognize 10% of the gain. 10% of the gain. The gain is 40,000. So 10,000 gain recorded, guess when? Now we're going to recognize 10,000 now. So if we recognize 10,000 now, how much left? 36. Would that gain evaporate? No. It's going to be defer. How do we defer again? By reducing the cost of the new truck. So the basis of the new machine is the fair value of the new machine minus the deferred gain, minus the deferred gain, which is the basis is 54,000. Another way to look at it is the book value of the old machine. Portion of the book value presumably sold only 6,000. Basically we presumably sold 10% of the 60,000 of the old machine. So basically we're saying is we sold the old machine and for cash 10% of it was cash. That's another way to look at it. Okay? So cash, we debit cash 10,000. We debit the new machine 54,000 as calculated above. Accumulated depreciation is for the old machine is 50 credit the old machine. And we have a gain on the disposal of the machine is 4,000. So the gain is recognized immediately. And here we have the $36,000 of the gain that we are deferring for the future. Let's go back to this example. Okay. So make sure you make sure you review this example so you understand so you understand it. Just in case you're wondering why the fair value is 100 is 90,000. The fair value was 100,000, but we received 10,000 cash back. So it is equal to 90,000. Just in case you are wondering how we come up with the 90,000 here. Okay. And here is a summary of the rules. Remember if it's a loss, we always recognize loss. Okay. Compute total gain or loss on the transaction. This amount equal to the difference between the fair value of the asset given up and the book value of the asset given up. Remember you are dealing with the assets that are given up to determine the gain or the loss. That's step one. If a loss is computed in step one, always recognize the loss. If a gain is computed and the exchange has a commercial substance, recognize the gain. Easy. If a gain is computed and the exchange lacks a commercial substance and no cash is received, no gain. You cannot recognize the gain. If some cash is received, if some cash is given, remember if given, it doesn't matter. It's about to receive. If some cash is given, no gain is recognized. If some cash is received, the following portion of the gain is recognized. So basically you have to figure out how much of the gain we need to recognize. If the amount of the cash exceeds, now remember, if the amount of the cash exceeds 25% or more, both parties recognize the entire gain or the entire loss. If there is a 25% amount of cash involved, what we are assuming here is the, it's a true transaction if they are exchanging cash. Therefore, we assume it has a commercial substance. Okay. Well, we could look at this example. Sent a company exchange equipment used in its manufacturing operation, plus $2,000 in cash for similar equipment. We are paying cash for similar equipment used in operation of Delaware Company. The following information pertain to the exchange. So sent a company exchange and equipment that it used in operation that has a cost of $28,000, accumulated depreciation of $19,000. So $28,000 minus $19,000 will give you the book value. The fair value is $13,000 and cash given up, they gave up, they paid $2,000. Remember, let's go back up here. If cash is given and there's a gain, it doesn't matter. What matters is if the cash is received. So for this party, cash is given up. So the first thing is what's $28,000 minus $19,000, $28,000 minus $19,000. That's $18,000, $18,000 minus $9,000 is $9,000 equal to $19,000. So the book value equal to $19,000 and the fair value equal to $13,000. Guess what? We have a loss for Santa. Delaware. The equipment has a cost of $28,000, accumulated depreciation of $10,000. So the book value for this is $18,000 and the fair value is $15,500. Also, Delaware will have a loss from the loss perspective. So let's record this transaction. For Santa, the fair value of the equipment received is $15,500. Minus the cash paid, they paid $2,000 cash. That's going to be reducing what we received, obviously, which gives them the asset of $13,500. Why? Because they had to pay cash because if the cash is going out, it's reducing the fair value of what we are receiving. Less the book value of the asset. So the book value of the asset is $28,000, $28,000 minus $19,000, obviously is $9,000, not $19,000, what I calculated earlier. So this is not $19,000, this is $0,000, this is $9,000. The book value is $9,000. I did the math error. The book value is $9,000. So the loss on the exchange is $4,000. I'm sorry, the gain here because I made a mistake about the book value. The book value is less than the fair value. So we have a gain of $4,500. We have a gain. Delaware, the fair value of the equipment is $13,000. They received cash of $2,000. So basically it's $15,500. That's how much they... That's the total fair value, total fair value because $13,500 plus $2,000 is the total. The fair value, the book value of the asset given up is $18,000. So if we compare $15,500 to $18,000, they have a loss, Delaware have a loss of $2,500. So let's go ahead and record the transaction. Santa would record the equipment at $15,500. Fair value of the equipment, $15,500. They removed the old equipment. They credit cash. They credit the old equipment to remove the old equipment and they credit again for $4,500. Delaware, they received cash of $2,000. They received a new equipment for $13,500. That's the fair value of the new equipment. They debit accumulated depreciation, $10,000. And they record the loss of $10,000 and they credit the old equipment for $28,000. So this is if it has commercial substance. Assuming here it has commercial substance. So if it has commercial substance, notice here, the gain is recorded. If it lacks commercial substance, this amount here will be removed from here and reduce the equipment. So if it lacks commercial substance, the cost of the equipment goes down. This is for Santa. For Delaware, if it has commercial substance, we're going to be recording the loss. If it lacks commercial substance, no difference. We're going to be recording the loss. And this is, don't forget, the loss is recorded regardless if we have commercial substance or if we lack commercial substance. You could read this business article from the Wall Street Journal just to expand your horizon. We may discuss it in class, but if you're online, you could just read it. Accounting for contributions. What happened if somebody contributed an asset to our business? Basically contribution. I'm just going to give you the rules. Companies should use the fair value of the asset. So what we do is because we really have no, if somebody given us an asset, there's no cost. Really, I mean, there's no cost. So how do we record it if there's no cost to us? Well, we record it at fair value and should recognize contribution received as revenue in the period received. So we're going to debit the asset at fair value. That's the debit. Let's assume, I don't know, make it 30,000. And we're going to credit some type of revenue for 30,000. Some say you should credit capital. Well, owners, you know, if the owners are getting something in return, it's capital contribution. But here nobody is getting anything in return. If they are just contributing, accounting for contribution, accounting for contribution. So let's take a look at this example. Max Meat Packing Inc. has recently accepted the nation of land with a fair value of 150 from the Memphis Industrial Development Core. So basically what they want them to do most probably to open a meat packing plan in Memphis and the Memphis Industrial Development. Okay. In return, well, it says promise to build a packing plant in Memphis. So what is the entry? We debit the asset, the land at fair value. We credit contribution revenue, some type of a revenue account called contribution revenue. When a company contribute a non-monetary asset, now the company contributing rather than receiving, it should record the amount of the donation as an expense at the fair value of the donated asset. Now, if we record it at fair value, if we have an old asset, if we have an asset, and an asset has a value of just for $30,000. Okay. And we're donating this asset. Okay. If we have to donate this asset at fair value, let's assume the fair value equal to 40. Well, guess what? If we're going to get rid of this asset, we still have to account for the difference. So we have to record again. Okay. Because we have to record the expense. Remember, here the expense will be, we have to record it at fair value, 40,000. The asset will be removed at 30,000, assuming no accumulated depreciation. So we have a 10,000 difference, then we have a gain. We have to record again. Okay. So if we record the expense at the fair value, because the expense being recorded at fair value, the expense right here, expense is debited at fair value, then we have to record any gain or loss. And let's look at this example. Client Industries donated a land to the city of LA for a city park. The land has a cost of 80,000 and a fair value of 110. Now think about it. You're going to be debiting an expense. I'm just going to write this here, then we will show you the answer. If you're going to be debiting an expense at fair value, the expense is 110. The land will need to be credited 80,000 because we are removing the land. So we are missing 30,000 in the entry. Well, guess what? We have to recognize the gain. We have to recognize the gain. So let me just delete this. Erase this so you can see the entry. Erase everything on the slide. Contribution expense, land and gain on the disposal of land. Notice, we have to record. If we incur the loss, we would also record the loss. 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