Essay About Monetary Assets And Fair Value

Essay: Accounting
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To know why we need to do accounting entries, firstly we should know what the situation is. When our clients swapped the truck they use for some deliveries for a packaging machine, this refers to:- Exchanging of non-monetary assets: a reciprocal transfer between two entities   one entity acquiring assets or setting obligations by surrendering assets or incurring other liabilities (Flood 2013) [pic 1]- Exchanging of dissimilar assets. – Besides, the truck our clients have used for some deliveries, it is long term in nature and usually subjected to depreciation, it has accumulated depreciation, and thus has carrying value. (AASB 116)There is some theoretical explanation on why we should do accounting entries on this transaction. Though there were no money exchanges hands and the business runs normally, but there were a gain or loss on the difference between the fair value assigned to the transactions & the carrying value of the asset surrendered. Especially for the dissimilar assets exchanges (Wiley 2002). Like in this case, swapping truck for a packaging machine. But why will have gain or loss? In order to know why this transaction has gain or loss, we need to know that during the transactions, commercial substance may exist. Commercial substance exists if the future cash flows change or the two parties’ economic position change due to the transaction (Kieso et al. 2004). If the transaction has commercial substance, when in non-monetary asset exchange, accounting for it is based on the fair value of the assets involved (AASB 116).If not, recording at book value, but for dissimilar transactions, there always has commercial substance (Wiley 2002). So we should use fair value in swapping truck for packaging machine. Here we can list a transaction that has loss on disposal to help you understand the loss process and what accounting entries are needed: Company A swaps an old truck with $1000000 cost and $750000 accumulated depreciation for a boat. The fair value (truck) is $150000. In this transaction, the boat should be recorded at fair value. Since this < the net book value of old truck (cost less accumulated depreciation), a loss is recorded for the difference. In accounting entries, we should debit accumulated depreciation, fair value of the boat, loss on this disposal and credit the cost of old truck.