Question

Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $12,500 (original cost of $29,000 less accumulated depreciation of $16,500) and a fair value of $9,100. Kapono paid $21,000 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 $505,000 and a fair value of $710,000. Kapono paid $51,000 cash to complete the exchange. The exchange has commercial substance.

rev: 06_22_2019_QC_CS-171508, 01_16_2020_QC_CS-195439

1. What is the amount of gain or loss that Kapono would recognize on the exchange of the land?
2. Assume the fair value of the farmland given is $404,000 instead of $710,000. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new land?
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 1

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Kapono

When the exchange has commercial substance then it means that future cash floes will change. In that case accounting should be done at fair value.

Answer 1	Amount $
Fair value of land	710,000.00
Less: Book value of land	505,000.00
Gain on sale of land	205,000.00
Answer 2
Fair value of land	404,000.00
Less: Book value of land	505,000.00
Loss on sale of land	(101,000.00)
Initial value of land
Fair value of land sold	404,000.00
Add: cash paid to complete the exchange	51,000.00
Initial value of land	455,000.00

Answer 3

When the exchange lacks commercial substance then in case of gain accounting should be done at book value and not fair value. Gains are also not recorded in this case.

So,	Amount $
Fair value of land	505,000.00
Less: Book value of land	505,000.00
Gain on sale of land	-
Initial value of land
Book value of land	505,000.00
Add: cash paid to complete the exchange	51,000.00
Initial value of land	556,000.00