Question

Required information [The following information applies to the questions displayed below.) Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $17,000 (original cost of $38,000 less accumulated depreciation of $21,000) and a fair value of $10,000. Kapono paid $30,000 cash to complete the exchange. The exchange has commercial substance. Case B. Kapono Farms exchanged 100 acres of farmland for similar land. The farmland given had a book value of $550,000 and a fair value of $800,000. Kapono paid $60,000 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 of the tractor? 2. Assume the fair value of the old tractor is $24,000 instead of $10,000. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new tractor? Complete this question by entering your answers in the tabs below. Required 1 Required 2 What is the amount of gain or loss that Kapono would recognize on the exchange of the tractor? Initial value of new tractor

Answer 1

1.The amount of gain on loss on exchange on tractor can be computed as:

Original cost of old tractor Less:accumulated depreciation Written down value Less :fair value of old tractor $38,000 $21,000 $17,000 $10,000 Loss $7,000

Thus a loss of$7,000 would be incurred on exchange of old tractor.

2.The amount of gain or loss if fair value of old tractor is $24,000 will be:

Fair value of old tractor Less:written down value of old tractor Gain from tractor $24,000 $17,000 $7,000

There will be gain of $7,000 if old tractor has a fair value of $24,000.

The initial value of the new tractor is computed as:

Fair value of old tractor Add:cash paid Initial cost of new tractor $24,000 $30,000 $54,000