In simple terms, a nonmonetary exchange is a trade. The book value of the old asset is removed and fair value is recorded for the new asset with any difference recorded as a gain or loss. The only
question is about the determination of fair value. Nonmonetary exchanges are usually recorded using the fair value of the asset surrendered because that is a measure of the sacrifice (cost) that is
made by the organization to acquire the new asset. If the fair value of the asset given up cannot be determined, the fair value of the asset received is used.
There is one major exception that you will find on many CPA exam questions. If a transaction does not have commercial substance (there was no reason to make the trade except in hopes of creating a reported gain to make the company look better), the new asset is recorded at the book value of the asset that was surrendered. Since no difference takes place, no gain or loss is reported. A transaction has commercial substance if the cash flows are significantly different as a result of the exchange. The configuration of cash flows includes the risk, timing, and the amount of future cash flows.
Subsequent Expenditures: Capitalize or Expense?
After land, buildings, and equipment are in use generating revenues, additional costs are often incurred. If the cost makes the asset more productive in some way (it is bigger, it produces more
goods, it produces better goods, it produces goods more efficiently than anticipated) or if the life is extended beyond what had been expected, the cost is capitalized (added to the reported cost of the
asset). If the life is extended, accountants often reduce accumulated depreciation by the amount of the cost.
Otherwise, the cost is expensed. It is a maintenance expense if anticipated and a repair expense if not anticipated.
Depreciation is the allocation of cost over the period that a long-lived asset is used to generate revenues in conformity with the matching principle. It is not an attempt to reflect fair value. It is
simply a means of spreading asset costs to periods in which the assets produce revenue. Essentially, the “depreciation base” is allocated over the asset’s useful life in a rational and systematic manner.
Land, and any other long-term asset that has an indefinite life, is not subjected to depreciation. There are many patterns that can be used to assign depreciation to a period but three general types:
straight-line that assigns the same amount to each period, accelerated depreciation which assigns more expense to the earlier time periods when more revenues are usually being generated, and
units-of-production which is a straight-line method based on the amount of work done rather than on years. The double-declining balance method is the most commonly used accelerated depreciation
method although the sum-of-the-years digits method is also seen.