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 $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. 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 $440,000 instead of $800,000. 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3

Answer 1

1.Gain or loss on exchange of land can be computed as:

Fair value of old land Less:book value of old land Gain from exchange of old land $800,000 $550,000 $250,000

2.Gain or loss if fair value of old land is $440,000 is:

Book value of old land less:fair value of old land Loss on old land $550,000 $440,000 $110,000

Thus if fair value of old land is $440,000, then there will be loss on land of amount $110,000

Fair value of old land Add:cash exchanged Initial cost of new land $440,000 $60,000 $500,000

The initial cost of new land=$500,000

3.In case land is treated as a commercial substance , gain or loss on it is realized whereas if the land lacks commercial substance there would be no loss or gain.Thus amount of loss or gain from such an exchange would be considered nil.

Book value of old land Add: Cash paid in exchange Value of new land $550,000 $60,000 $610,000

The initial value of new land=$610,000