Question

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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 insteay 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 few tractor? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Assume the fair value of the old tractor given is $24,000 instead of $10,000. What is the amount of gain or loss that Kapone would recognize on the exchange? What is the initial value of the new tractor? Gain on exchange of assets Initial value of new tractor $ 54,000 Required 1 < Prev 45 of 6 Next >

Answer 1

1… Case A --- Tractor
FV of old tractor= 10000
New tractor(FV 10000+30000 cash)	40000
Acc. Depn.-Old tractor	21000
Loss on exchange(Bal.fig.)	7000
Old tractor (Cost)		38000
Cash		30000
Kapono would recognise Loss on exchange = 7000
FV of old tractor= 24000
New tractor(FV 24000+30000 cash)	54000
Acc. Depn.-Old tractor	21000
Old tractor (Cost)		38000
Cash		30000
Gain on exchange(Bal.fig.)		7000
Kapono would recognise Gain on exchange = 7000
Initial Value of new tractor = $ 54000
Case-B -- Land
1.Land(new) --Fair value	800000
Land(old)---- cost		550000
Cash		60000
Gain on exchange (Bal.fig.)		190000
Gain on exchange of land recognised = 190000
2.Land(new) --Fair value	440000
Loss on exchange (Bal.fig.)	170000
Land(old)---- cost		550000
Cash		60000
Loss on exchange of land recognised = 170000
Initial value of new land= $ 440000
3..Same as in 1 --but lacking commercial substance
Land(new) (exchange value)	610000
Land(old)---- cost		550000
Cash		60000
Gain is not recognised in exchanges lacking commercial substance. It is adjusted in the new land cost, ie. ( FV 800000-190000 gain)= 610000. (Gain reduces the cost of the new asset , in exchanges lacking commecrial substance. On the other hand, loss is recognised.
Initial value of new land= $ 610000