Which of the following would indicate a nonmonetary exchange has commercial substance: A. The fair value...

Which of the following would indicate a nonmonetary exchange has commercial substance:

A. The fair value of the asset received is significantly higher than the book value of the asset given up.

B. Cash was received in the exchange.

C. The expected cash flows associated with the asset involved in the exchange re significantly different.

D. Both A&C

Solutions

Expert Solution

A business is said to have commercial substance when its future cash flows are expected to change due to number of transaction.It is also applicable when exchange of assets between the businesses occur as a transaction.But change in the cash flow takes place for the below reasons:

Risk - Increase in the risk for inbound cash flows will not occur, which will lead to a larger repayment amount. Higher interest percentage for the debt taken.

Timing - Change in the timing of cash inflows, a business agrees to a delay its payment in exchange for a larger amount as in a future date.

Amount : Its a vice-versa of the Timing attribute as and when we receive a due amount before the due date, due to which the business receives a smaller amount than the expected higher amount.

So, from the above description and the question asked we can conclude that both A & C(Option D) is correct.

ekkarill92 answered 2 months ago

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