Case 8 RE: Melvin Corporation and Vivian Company Nonmonetary Transaction Facts: Melvin Corporation and Vivian Company entered into an agreement on January 1, Year 1, to unconditionally exchange assets. Melvin agreed to transfer, on January 1 of Year 2, a building that cost $100,000, but had an appraised value of $300,000, while Vivian agreed to transfer a boat that had originally cost $250,000. As of December 31, Year 2, Melvin had received title to the boat but had not transferred title to the building. Issues: (1)Does the uncompleted transaction qualify as a reciprocal nonmonetary exchange? 2)How should the transaction be recorded for each entity? Conclusions: (1)The transaction does not qualify as a reciprocal nonmonetary exchange since Melvin Corporation has not yet transferred title to the building. (2)As the recipient of an asset in a nonreciprocal nonmonetary exchange, Melvin Corporation should record the boat by its estimated fair value at the time it is received. As the transferor of an asset in a nonmonetary transaction, Vivian Company should record a loss on the transfer of the disposed asset. Authorities on Costs to Exit a Lease Contract
A summary of the relevant ASC literature regarding nonmonetary exchanges follows: ASC 845-10-25-1 states that a reciprocal transfer of a nonmonetary asset qualifies as an exchange only if the transferor has no substantial continuing involvement in the transferred asset. ASC 845-10-20 defines the term nonreciprocal transfer as a transfer of assets or services in one direction. ASC 845-10-30-1 states that for a nonreciprocal transfer, the recipient of the asset should record the transferred asset at its fair value; the transferor of the asset should recognize a gain or loss on the disposition of the asset.
Application of authorities: (1)Since Melvin still has an outstanding obligation to transfer the building to Vivian, the transaction does not meet the FASB requirements of a reciprocal exchange. (2)At the end of year 2, Melvin should recognize the boat as a new asset and record it at its fair value; Vivian should dispose of the boat and recognize a gain/loss based on the fair value at the time of transfer. If Melvin transfers title to the building subsequent to year 2, it will need to dispose of the asset while recognizing the gain/loss, and Vivian will record the building at its fair value.