How to Solve “Exchanges with No Commercial Substance” (aka Like-Kind Exchange)” Questions
Mastering multi-step word problems is one key to scoring high on the CPA Exam. Not only will competence with these questions boost your confidence, but also it will speed up your calculations, allowing you to allot time to other areas of the exam.
Note: It is beneficial to practice BOTH methods, because the best method to use for each question depends upon the information provided in the question. If no boot is received, property received is valued at the book value of the property surrendered + boot paid. In which case, Method A is very easy and is preferred.
Like-Kind Exchange Example/Practice Question
JVC, Inc. offered a 4-year old work truck and $1,000 to Walter Enterprises for a 3-year old work truck. JVC purchased the 4-year old truck when it was new for $28,000, and the truck now has accumulated depreciation of $18,000 and a fair value of $12,000.
Walter’s truck’s original purchase price was $29,000, and its accumulated depreciation and fair value are now $17,000 and $13,000, respectively. Walter accepted the offered trade, which has no commercial substance. What amount should JVC record as the new book value for the truck received?
Correct Answer: $11,000
If a transaction lacks commercial substance no gain is recognized. If one of the parties pays boot (cash in this case) the boot is added to the book value of the surrendered property to determine the book value of the property received.
|BV of new truck||$11,000|
This question is a perfect example of a situation in which Method A is preferred because property received is easily computed at the book value of the property surrendered + boot paid. Method B is used in this case to eliminate wrong answer choices, because the book value of property received may never exceed FMV.
Learn More With A Free Trial From MDS CPA Review
For more information on Like-Kind Exchanges (Exchanges with no Commercial Substance), access a Free Trial of the MDS CPA Review materials.
After signing in:
- Enter the Student Dashboard (or access it from the dropdown list on the “Welcome” tab).
- Scroll to “Your Courses” and select “Financial Accounting and Reporting (FAR).”
- In Class 2, select video IV.H.4.b. Non-cash Exchanges. Section c. of the video (No Commercial Substance) begins at 2 minutes, 07 seconds.