Question

[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.

Assume the same facts as Requirement 1 and 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?

Assume the same facts as Requirement 1 and 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?

	Initial value of new land

Answer 1

Solution

Kapono Farms

1. Exchange of land with commercial substance –

Determination of the amount of gain or loss that Kapono would recognize on the exchange:

Book value of land = $550,000

Fair value of land = $800,000

Gain in exchange of land = 800,000 – 550,000 = $250,000

Initial value of land = fair value + cash paid for exchange

= $800,000 + $60,000 = $860,000

Initial value of land = $860,000

2. Exchange of land when exchange lacked commercial substance –

Determination of the gain or loss:

When an exchange of property lacks commercial substance, no profit or loss would be recognized.

Initial value of land = book value + cash paid

= $550,000 + $60,000 = $610,000

Initial value of land (exchange lacks commercial substance) = $610,000