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 $21,500 (original cost of $47,000 less accumulated depreciation of $25,500) and a fair value of $10,900. Kapono paid $39,000 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 $595,000 and a fair value of $890,000. Kapono paid $69,000 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? 2. Assume the fair value of the farmland given is $476,000 instead of $890,000. 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?

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Answer 1

Solution:
Required 1
		Remarks
Gain on exchange of old assets	226000	(890000-595000-69000)
Initial value of new land	890000
Required 2
Loss on exchange of assets	188000	(476000-595000-69000)
Initial value of new land	476000
Required 3- Commercial Substance is missing
No gain/loss on exchange of assets	0
Initial value of new land	664000	(595000+69000)