AFA 717 Lecture Notes - Lecture 10: Deferred Income, Intangible Asset, Issued Shares

Questions:

Regarding Opeion 3, How doyou get Equipment 70000?

Regarding Option 4, how doyou get 22% and what does it mean?And how do you get Equipment57000

Exercise 9 Exchange ofNonmonetary Assets: The WelchCompany owns a machine used in the company’soperations. The machine cost $75,000 and hasaccumulated depreciation of $30,000 based on anaccelerated depreciation method. Welch Company would like topurchase a newer machine to replace the existing machine and isconsidering several options. The machine owned by Welch Company hasa fair (market) value of $55,000.

Based on the information given above,what is the gain on the disposal of the used machine? (Note: WelchCompany may or may not be able to recognize this gain.)

Book value = Cost – Accm Depr = $75,000 – 30,000 =$45,000

Gain/loss = Fair value – Book Value = $55,000 – 45,000 = $10,000gain

Required: Record thejournal entry for the disposal under each of the followingoptions.

SALE

Option 1: WelchCompany can sell the used machine to a competitor for $60,000 cash.The company would then purchase a new machine from a dealer.Recognize gain?

NON-MONETARY EXCHANGE – COMMERCIAL SUBSTANCE (bootpaid)

Option 3: WelchCompany can exchange the used machine for a newer machine(currently being used by another company). The newer machine has afair value of $70,000. Welch Company would have to pay $15,000 incash. Assume the exchange has commercial substance. Is this amonetary exchange? Recognize gain?

NON-MONETARY EXCHANGE – NO COMMERCIAL SUBSTANCE(boot paid)

Option 4: WelchCompany can exchange the used machine for a newer machine(currently being used by another company). The newer machine has afair value of $67,000. Welch Company would have to pay $12,000 incash. Assume the exchange has no commercial substance. Is this amonetary exchange? Recognize gain? 12/67 = 22%nonmonetary

NON-MONETARY EXCHANGE – COMMERCIAL SUBSTANCE (bootreceived)

Option 5: WelchCompany has also been approached by a competitor with a similarmachine worth $50,000. The competitor has offered to pay $5,000cash to Welch. Assume this exchange has commercial substance. Isthis a monetary exchange? Recognizegain?

On September 3, 2018, the Robers Company exchanged equipment with Phifer Corporation. The facts of the exchange are as follows: Robers’ Asset Phifer’s Asset Original cost $ 145,000 $ 165,000 Accumulated depreciation 75,000 83,000 Fair value 82,500 72,500 To equalize the exchange, Phifer paid Robers $10,000 in cash. Required: Record the exchange for both Robers and Phifer. The exchange has commercial substance for both companies. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

FASB SFAS 157 was issued September 2006 for application tofinancial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.This Statement, which applies to assets and liabilities, definesfair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. The statement does notapply to assets acquired and liabilities assumed in an acquisitionof a business or non-profit activity by a not-for-profit entitythat are required to be measured at fair value under FASB StatementNo. 164. The objective of a fair value measurement is to determinethe price that would be received to sell the asset or paid totransfer the liability at the measurement date which is the exitprice. The fair value measurement assumes that the asset orliability is exchanged in an orderly transaction between marketparticipants. For assets, fair value measurement assumes thehighest and best use of the asset by market participants,considering the use of the asset that is physically possible,legally permissible, and financially feasible at the measurementdate. The highest and best use of the asset establishes thevaluation premise. For liabilities, it is assumed that theliability is transferred to a market participant at the measurementdate and that the nonperformance risk relating to that liability isthe same before and after its transfer. The fair value of theliability shall reflect the nonperformance risk relating to thatliability. As in our text, the position in the statement is thatvaluation techniques must be consistently applied. It emphasizesthose valuation techniques using the market approach, incomeapproach, and cost approach to measure fair value. In some cases asingle valuing technique may serve the purpose, however in others,using multiple techniques may be more appropriate. The informationthat is available will help to determine which method that shouldbe used. Examples are provided in Appendix A to illustrate thevarious approaches for certain transactions. The statement alsoestablishes a fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value by placing theminto three broad levels in order to increase consistency andprovide better comparability. Level 1 is given the highest priorityand is based on quoted prices (unadjusted) in active markets foridentical assets or liabilities that the reporting entity has theability to access at the measurement date. Level 2 is based oninformation other than quoted prices included within Level 1 thatare observable for the asset or liability, either directly orindirectly through substantiation with observable market data.Level 3 has the lowest priority and is based on unobservable inputsfor the asset or liability, primarily, inputs that reflect thereporting entity’s own assumptions.

Follow-Up Discussion Expand upon any of the points identified byyour classmates and/or ask for clarification on points that you donot understand.

I have provided the classmates response.

300 words