Question

Kapono Farms exchanged 100 acres of farmland for similar land. The farmland given had a book value of $555,000 and a fair value of $810,000. Kapono paid $61,000 cash to complete the exchange. The exchange has commercial substance.

Required:
1. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new land?
2. Assume the fair value of the farmland given is $444,000 instead of $810,000. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new land?
3. Assume that the exchange lacked commercial substance. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new land?

Answer 1

1)

Land has no depreciation. Therefore book value of a land is the initial cost. Here book value is $555,000 and its fair value is $810,000. Thus gain/loss is:

Fair value	$810000
Less: book value	($555000)
Gain from exchange of old land	$255000

Initial cost of new land exchanged for old one is:

Fair value of old land	$810000
Add: cash value paid	$61000
Cost of new building	$871000

2)

As the fair value of old land is $444,000, loss/gain from such exchange is:

Book value of old land	$555000
Less: fair value of old land	($444000)
Loss on exchange of land	$111000

Initial value of new land is shown below:

Fair value of old land	$444000
Add: cash paid	$61000
Initial cost of new land	$505000

3)

When land is treated as commercial substance, gain or loss should be recognized. But when it is not so treated loss or gain does not arise. Therefore, amount of gain / loss from such exchange is considered as nil.

Value of new land is the book value plus any extra money paid in such exchange. The calculation is shown below:

Value of new land = book value + cash paid

= $555000 + $61000

= $616000

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