In a nonmonetary exchange of equipment, if the exchange has commercial substance, a gain is recognized if:

a. The fair value of the equipment received exceeds the book value of the equipment received.

b. The book value of the equipment received exceeds the fair value of the equipment given up.

c. The fair value of the equipment surrendered exceeds the book value of the equipment given up.

d. None of the above is correct.

The correct answer is a. The fair value of the equipment received exceeds the book value of the equipment received.

Explanation:

A non-monetary transaction is a contract, business agreement or economic event in which a company does not distribute any amount of money. Accountants often call this type of transaction a "non-monetary transaction" or "non-monetary element." Examples of this include depreciation, amortization and depletion. Depreciation is the periodic distribution of the cost of a tangible asset to match the income that the resource produces. Tangible assets include equipment and computers. Amortization is the equivalent of depreciation for resources such as patents and registered trademarks, which accountants call "intangible assets." Exhaustion is the gradual reduction of land value and is a common term in extractive industries, such as mining, oil and gas.

Accounting entries differ for non-monetary transactions, so you must pay attention to the underlying economic event to determine which entry applies. To record depreciation, debit the accumulated depreciation expense account and credit the accumulated depreciation account. The entry for amortization is as follows: debit the amortization expense account and credit the corresponding intangible assets account. To record the depletion, debit the depletion expense account and credit the depletion reserve account. Obviously, all these entries do not involve the cash account. Any reserve account is a counter-account, which means that it reduces the value of your respective resource account.