Processing a like-kind exchange transaction

When you exchange an asset for a similar asset, and the exchange results in a gain smaller than 25 percent, you must dispose of the old asset, defer the temporary loss incurred, and then add a new asset that clears the deferred loss and acknowledges the recognized gain. The recognized gain is the proportional gain allowed by the Federal tax authorities.

Before you start this procedure, collect the required information on both the disposed asset and the new asset.

Process a like-kind asset transaction

  1. Determine whether you have a total gain or loss in the exchange.
  2. Determine whether gain needs to be recognized proportionally.

    • If you have a total loss or if the gain is greater that 25 percent, follow the standard disposal procedure for the old asset, and then follow the standard addition procedure for the new asset.

    • If you have a gain smaller than 25 percent, continue with step 3.

  3. Calculate the recognized and unrecognized gain and new asset basis by using the calculations described for like-kind exchange transactions. Calculations used in a like-kind exchange transaction
  4. Process the disposal.
    1. Access Disposals (AM40.1).
    2. Define the disposal information. Specify this information:
      Type

      Select Exchange as the disposal type.

      Property

      You can further define the disposal code by adding a property code.

      Proceeds and Expense

      If you received cash in addition to the exchanged asset, select the transaction currency in the Proceeds Currency field, and specify the amount in the Proceeds Amount field.

      Note: If you do not specify a value in the Currency field, the company base currency defaults.
      Quantity

      If you specify a quantity that is less than the total asset quantity and the asset has more than one item, the disposal is a partial disposal and the program navigates to Items (40.2).

      If you specify the total asset quantity or the asset has only one item, the program navigates to Gain or Loss (AM40.3) and displays the loss incurred in the Gain or Loss field.

    3. If the disposal is partial, select the items to be disposed on Items (40.2).

      After you have selected the items, the program navigates to Gain or Loss (AM40.3) and displays the loss incurred in the Gain or Loss field.

      The loss is calculated as follows:

      Old Asset - (Proceeds + Accum Depr) = Loss

    4. On the Exchange tab of AM40.3, specify the entire loss amount in the Deferred Gain or Loss field.

      The program navigates to Journal Entries (AM40.4).

      If the Display Journal Entries system option is set to N (No) on System Options (AM16.1), journal entries are added without being displayed. You can still open Journal Entries (AM40.4) to see what journal entries were added and to modify them at any time before you release the asset.

    5. Accept, change, or delete the journal entry on AM40.4.

      • Change any data in the journal entry, if necessary.

      • To accept a journal entry, select Add. The asset is disposed of.

        or –

        To delete the journal entry, close the form without choosing Add. The asset is disposed of, but the journal entry is not recorded.

        Note: To print assets by a specific disposal code or disposal property, use the Disposal Options tab.
    6. Disposal Report (AM240) or Verify the accuracy of disposals by running the Disposal Report (AM240) or Item Disposal report (AM245) with an N (No) in the Release field to produce a report of disposals to be verified.
    7. If any information is incorrect, delete the disposal record and then add it again on AM40.1.
    8. Release the disposal online, using Disposals (AM40.1)
  5. Process the new asset addition.
    1. Define an account group with the deferred loss account defined as the clearing account. Defining an account group
    2. Define an asset template that contains the account group you just defined. Defining asset addition templates
    3. Access Quick Addition (AM20.1).
    4. Define an asset. Adding assets by using quick addition Specify this information:
      Template

      Use the template you defined in step b.

      Company

      Select the company that was used in the disposal.

      Main tab

      Any values specified on the template for the corresponding fields are displayed. You can accept the values or provide your own values.

      Because you are using the deferred loss account as a clearing account, the accounting unit used for the clearing account should be the same as the accounting unit used for the disposed item's deferred loss account.

      Adding assets by using quick addition

      Items tab

      You must define at least one item. The only required fields are the purchase date, the quantity, and the cost.

      The total cost must be equal to the new asset basis calculated in step 3.

      You can also add bar-code, invoice, or activity information. Adding assets by using quick addition

      Overrides tab

      Override any of the asset or asset book information on the template.

      Do not override the asset group. The account group must be the one you defined in step a.

      Control Totals tab

      You can check whether the total number of items added is the total number of items for the asset and the total cost of the items is the total cost specified

      Note: This feature is useful if you are specifying a large number of items.
    5. Adjust and add the journal entries so they appear as follows:
      Account Debit Credit Description
      Asset X Should be equal to the new asset basis amount calculated in step 3.
      Deferred Loss X Adjust so it is equal to the deferred loss specified during the old asset disposal.
      Gain X

      Specify the recognized gain amount calculated in step 3.

      Note: The total of the deferred loss and recognized gain should equal the asset amount.
    6. Release the added asset online on Additions and Adjustments (AM20.2).
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