Question

GAAP requires the gains on exchanges of non monetary assets to be recognized if the exchange had commercial substance

a) Gains should always be recognized, regardless of commercial substance.
b) Gains should be recognized only if the exchange lacks commercial substance.
c) Gains should be recognized if the exchange has commercial substance.
d) Gains recognition is optional and depends on management discretion.

Answer 1

Gains on exchanges of non-monetary assets should be recognized under GAAP when the exchange has commercial substance, indicating that the transaction has altered the economic circumstances of the entity.

Step-by-step explanation:

The subject of this question concerns the recognition of gains on exchanges of non-monetary assets in accordance with Generally Accepted Accounting Principles (GAAP). According to GAAP, gains should be recognized on exchanges of non-monetary assets if the exchange has commercial substance. What this means is that the economic circumstances of the entity have changed as a result of the transaction. Gains should be recognized since they are not just a one-time event, but they often represent ongoing benefits to the entity involved. The recognition of such gains is not optional or at management discretion; it is mandated by the accounting standards if the exchange impacts the entity's future cash flows.