Q: What mistakes do candidates make on this CPA question?

Recognizing full gain; recognizing zero gain; calculating ratio based on BV instead of FV.

Question 1

Company A exchanges a truck (Book Value $20,000, Fair Value $25,000) for a machine from Company B (Fair Value $22,000) and receives $3,000 cash. The exchange lacks commercial substance. What gain should Company A recognize?

Accepted Answer

1. Calculate Total Potential Gain (FV Old - BV Old). 2. Check Commercial Substance. No? -> 3. Was cash received? Yes -> 4. Calculate Boot Ratio (Cash / Total Consideration). 5. If Ratio < 25%, Gain = Total Gain * Ratio.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Recognizing full gain; recognizing zero gain; calculating ratio based on BV instead of FV.

Company A exchanges a truck (Book Value $20,000, Fair Value $25,000) for a machine from Company B (Fair Value $22,000) and receives $3,000 cash. The exchange lacks commercial substance. What gain should Company A recognize?

How to approach this question

Full Answer

Common mistakes

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