Question

What does it mean if an exchange of plant assets has commercial substance? Are gains and losses recorded on the books because of the exchange?

Short answer

An exchange having commercial substancewill affect the business’s future cash flow, and the gains or losses arising from the same must be recorded in the books of accounts.

Step-by-step solution

Definition of Plant Assets

The assets employed in the business unit for the long-term purpose of producing goods or services are known as plant assets. These assets are charged with expenses known as depreciation.

Exchange of plant assets having commercial substance

The exchange of plant assets has commercial substance when the exchange affects the future cash flow of the business entity.

If the exchange has commercial substance, the business entity must record the gain or loss arising from such exchange.