CPA Financial Accounting and Reporting (FAR) : Non-Monetary Exchanges
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Example Questions
Example Question #1 : Revenue
On January 2, Year 1, a company buys a piece of equipment for $50,000 with a 10 year life and a residual value of $8,000. It is depreciated using the straight line method. On July 1, Year 4, the equipment is worth $44,000 and is traded for a van worth $46,000. What amount of gain is recognized on this exchange?
$8,700
$0
$2,000
$10,700
$8,700
Depreciation is recorded at $4,200 per year ($50K purchase price - $8K residual value over 10 years) for 3.5 years. The total book value at the time of the exchange is $35,300 ($50K purchase price - $14,700 depreciation). This book value is compared to the old asset's fair value to determine how much gain is realized ($44K FV - $35,300 BV). Because this transaction has commercial substance the gain is recognized.
Example Question #2 : Revenue
The Scott Company owns an asset with a cost of $320,000, a book value of $305,000, and a fair value of $345,000. The asset is traded for another asset and the exchange is viewed as having no commercial substance. Which of the following is true regarding the exchange?
The new asset will be recorded at $345,000
The new asset will be recorded at $320,000
The new asset will be recorded at its fair value
The new asset will be recorded at $305,000
The new asset will be recorded at $305,000
When an exchange has no commercial substance, and no cash changes hands, the new asset is booked at the book value of the old asset.
Example Question #3 : Revenue
ABC factored receivables without recourse with DEF bank. ABC received cash as a result of the transaction , which is best described as a:
Sale of ABC's A/R to DEF, with the risk of uncollectible accounts transferred to DEF
Loan from DEF collateralized by ABC's A/R
Loan from DEF to be repaid by the proceeds from ABC's A/R
Sale of ABC's A/R to DEF, with the risk of uncollectible accounts held by ABC
Sale of ABC's A/R to DEF, with the risk of uncollectible accounts transferred to DEF
Factoring A/R without recourse is a sales transaction. Factoring without recourse transfers risk of collectability to the buyer.
Example Question #4 : Revenue
One method of estimating uncollectible accounts emphasizes the asset valuation over income measurement. This is the allowance method based on:
Credit sales less returns and allowances
Gross sales
Direct write off
Aging receivables
Aging receivables
Estimating bad debt on aging of receivables is a good matching of revenue and expense. It focuses on the balance sheet and emphasizes the valuation of assets.
Example Question #5 : Revenue
Under IFRS rules, the ___________ is required for recognizing revenue from construction contracts.
Both
Percentage of completion method
Completed contract method
Neither
Percentage of completion method
The percentage of completion method for revenue recognition is required under IFRS unless the final outcome of the construction project cannot be reasonably estimated.
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