Question

The Parsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Parsley carried the land at its original cost of $27,500. According to an independent appraisal, the land currently is worth $ 66,000. Parsley gave $13,200 in cash to complete the transaction. Required: (1) What is the fair value of the new parcel of land received by Parsley? (2) Prepare the journal entry to record the exchange assuming the exchange has commercial substance. (3) Prepare the journal entry to record the exchange assuming the exchange lacks commercial substance.

Answer 1

1. Fair value of the new parcel of land received by Parsley = Fair value of old land + Cash paid for acquisition of new land = 66,000$ + 13,200$ = 79,200$

2. Journal entry assuming exchange has commercial substance is as follows :

S. No.	Particulars	Dr. ($)	Cr. ($)
1	Land (new) a/c ..DR	79,000
	To Cash a/c		13,200
	To Land (Old) a/c		27,500
	To Gain on Exchange of land		38,500

Computation of Fair value of parcel to be recorded in books considering exchange has commercial substance :

a. Fair value of old land as per independent appraiser : 66,000$

b. Cash paid to acquire new land : 13,200$

Total value of new land : 79,200$

3. Journal entry assuming exchange does not have commercial substance is as follows :

S. No.	Particulars	Dr. ($)	Cr. ($)
1	Land (new) a/c ..DR	40,700
	To Cash a/c		13,200
	To Land (Old) a/c		27,500

Computation of Fair value of parcel to be recorded in books considering exchange does not have commercial substance :

a. Book value of old land : 27,500$

b. Cash paid to acquire new land : 13,200$

Total value of new land : 40,700$