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Required information [The following information applies to the questions displayed below.] Case A. Kapono Farms exchanged anRequired information (The following information applies to the questions displayed below.] Case A. Kapono Farms exchanged anRequired information [The following information applies to the questions displayed below.) Case A. Kapono Farms exchanged an

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Answer #1

Information Given -

Kapono Farms exchanged 100 acres of farmland for similar land.

The farmland given had a book value of $555000 and a fair value of $810000.

Kapono paid $61000 cash to complete the exchange. The exchange has commercial substance.

.

(1) -- What is the amount of gain or loss that Kapono would recognize on the exchange of the land?

Answer -

Calculations Amount
A. Gain on Exchange of land

= Fair value of land - Book value of land

= $810000 - $555000

= $255000

$255000
B. Initial value of the new land

= Fair value of land + Cash given

= $810000 + $61000

= $871000

$871000

.

(2) -- Assume the fair value of the farmland given is $444000 instead of $810000. 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 -

Calculations Amount
A. Loss on Exchange of land

= Fair value of land - Book value of land

= $444000 - $555000

= -$111000

-$111000
B. Initial value of the new land

= Fair value of land + Cash given

= $444000 + $61000

= $505000

$505000

.

(3) -- 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?

Answer -

Note - When a exchange transaction lack commercial substance then no gain or loss will be recognized on the exchange.

Initial value of the new land -

= Book value of land + Cash given

= $555000 + $61000

= $616000

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