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. Required: 1. What is the amount of gain or loss that Kapono would recognize on the exchange of the tractor? 2. Assume the fair value of the old tractor is $26,000 instead of $10,200. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new tractor?

Answer 1

	1)
	The loss or gain from the exchange of old tractor will be
		Original Cost Of Tractor			$         40,000
		Less: Accumulated Depreciation			$         22,000
		Book Value Of Tractor			$         18,000
		Less: Fair Value			$         10,200
		Loss On Exchange			$           7,800
	2)	The loss or gain from the exchange of old tractor will be if fair value is $26000
		Original Cost Of Tractor			$         40,000
		Less: Accumulated Depreciation			$         22,000
		Book Value Of Tractor			$         18,000
		Less: Fair Value			$         26,000
		Profit On   On Exchange			$           8,000
		A new tractor has been exchanged for an old one. Cash of $32000 has been paid.
		Thus the cost of a new truck will be the fair value of old truck plus cash paid.
		Therefore the initial value of the new tractor would be
		Fair Value of old tractor			$         26,000
		Add: Cash Paid			$         32,000
		Value Of New Tractor			$         58,000
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