Dissimilar Assets Exchanged with a Gain In the second situation assume the same facts except that the assets exchanged are fundamentally different. For example, assume the asset given up is an automobile that is exchanged for equipment. Once again, it is useful to analyze what is being given up and what is re-ceived. These facts are summarized in Exhibit 6-5. The relevant value for the items given up is $5,200, the automobile with a book value of $3,200 (c) and the $2,000 cash (d). The relevant value for the item acquired is the fair market value that once again is $5,500 (e). The facts again indicate a gain of $300. In this case, however, the assets are dissimilar (fundamentally different), and there is no prohibition against recognizing the gain; indeed, it must be recognized. The general journal entry to record the exchange of the dissimilar assets is: Once again, several portions of the entry are fairly obvious. The automobile and its related accumulated depreciation are removed from the books and the cash is paid. In this case the new asset (equipment) is recorded at its fair market value and the gain that is realized on the transaction the difference between what was given up and what was received—is recognized. Similar or Dissimilar Assets Exchanged with a Loss In the third example assume that the automobile is traded in and that the same $2,000 cash is paid out but that the list price and fair market value) of the new asset (equipment) is only $5,000. These facts are summarized in Exhibit. Once again, the transaction should be analyzed in terms of what Paul Company is giving up and is receiving. In this case the company is again giving up assets with a total book value of $5,200 (the automobile with a book value of $3,200 and the $2,000 cash). It is receiving a new asset (equipment) with a fair market value of $5,000 (e). Conse-quently, the company is giving up more than it is receiving. The facts indicate a loss of $200. When there is a loss, it makes no difference whether the assets are similar or dissimilar; the special rule applies only to gains. The general journal entry to record this exchange, regardless of the type of assets involved, is: Again, three elements of the entry are fairly obvious: the removal of the old asset, its accumulated depreciation, and the payment of the cash. The proper value for the new equipment is its fair market value. No asset should be entered on the books with a cost greater than its true value, even though in this case Paul Company had to give up more than what the asset was worth to acquire it. The difference between what was given up and what was acquired is debited to a loss account. Remember that the nature of the assets involved does not matter in situations involving a loss; losses are recorded whether the assets are similar or dissimilar. Some additional complicating factors associated with exchanges of assets are worthy of mention. For federal income tax purposes neither gains nor losses on exchanges of similar assets are recognizable. For financial accounting purposes losses (but not gains) are recognized; however, the tax rules do not allow a reduction in taxable income as a result of exchanges of similar assets. For tax purposes gains on exchanges of dissimilar assets are taxable and losses on exchanges of dissimilar assets are deductible. Another complexity arises in situations in which an apparent gain on an exchange of similar assets and cash are received. The accounting rule prohibiting recognition of gains on exchanges of similar assets applies to pure exchanges, not to sales. Gains on sales of assets are always recognized. When cash is received in the disposition of an asset, the transaction becomes, at least partially, a sale. Therefore, if similar assets are exchanged and there is an apparent gain by the party receiving cash, part of that gain should be recognized. The portion of the apparent gain that should be recognized is the portion of the total value received consisting of cash. The recorded value of the noncash asset received is also increased over what it would otherwise be by the amount of the gain. Details of this treatment are beyond the scope of this text.