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An Illustrative Approach Using Journal Entries
Journal entiles can function as both a teaching and learning tool, enhancing the understanding of book accounting requirements and the relationship between book and tax reporting requirements for not only students, but also seasoned professionals. One tax concept that journal entries can help explain is like-kind exchanges of plant assets under Internal Revenue Code (IRC) section 1031. This article incorporates accounting journal entiles in a senes of examples adapted from the Treasury Regulations in order to aid in one's understanding of 1) basis calculations for like-kind property received when there is boot (i.e., non-like-kmd property) involved in the exchange, and 2) whether a realized gain or loss should be recognized and, if so, for what amount.
Tax and Accounting Treatment of Exchanges of Plant Assets
The handling of like-kind exchanges of plant assets is generally not the same for both GAAP and tax purposes. GAAP rules for nonmonetary exchanges speak to the commercial substance of the transaction, deemed to exist "if the entity's future cash flows are expected to significantly change as a result of the exchange," according to Accounting Standards Codification (ASC) 845-10-30-4. This would presumably be the case, for example, if a company exchanged a tract of land for a building. Under ASC 845-1030-1, in an exchange of nonmonetary assets with commercial substance, gain or loss is recognized as the difference between the fair value of the asset surrendered and its book value, irrespective of any cash (i.e., boot) included in the exchange. For transactions determined to lack commercial substance, ASC 845-10-30-3 specifies that the exchange be based on the recorded amount of the assets given up, not the fair values of the exchanged assets. This would presumably be the case if a company exchanged one tract of land for a virtually identical tract of land in terms of size or location (among other factors).
In contrast, the IRC does not address the concept of commercial substance with respect to nonmonetary exchanges. IRC section 1031(a) states that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind, which is to be held...