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 $18,000 (original cost of $40,000 less accumulated depreciation of $22,000) and a fair value of $10,200. Kapono paid $32,000 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 $560,000 and a fair value of $820,000. Kapono paid $62,000 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 $448,000 instead of $820,000. 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

Case B

1. Gain on exchange = Fair value - Book value = $820000 - $560000 = $260000

2. Loss on exchange = Book value - Fair value = $560000 - $448000 = $112000

Initial value of new land = Fair value of old land + Cash paid = $448000 + $62000 = $510000

3. Since the exchange lacked commercial substance, no gain or loss will be recognized.

Initial value of new land = Book value of old land + Cash paid = $560000 + $62000 = $622000