Question

The Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the land currently is worth $72,000. Tinsley paid $14,000 in cash to complete the transaction. 

 

Required: 

1. What is the fair value of the new parcel of land received by Tinsley? 

2. Prepare the journal entry to record the exchange assuming the exchange has commercial substance. 

3. Prepare the journal entry to record the exchange assuming the exchange lacks commercial substance. 

4. Prepare the journal entry to record the exchange except that Tinsley received $9,000 in the exchange, and the exchange lacks commercial substance.

Answer 1

Part 1

Fair value of new land = Fair value of old land + Cash given = 72000+14000 = $86000

 

Part 2

Account titles	Debit	Credit
Land – new	86000
Cash		14000
Land – old (book value)		30000
Gain (72000-30000)		42000

 

Part 3

Account titles	Debit	Credit
Land – new (30000+14000)	44000
Cash		14000
Land – old (book value)		30000

 

Part 4

Account titles	Debit	Credit
Land – new	26250
Cash	9000
Land – old (book value)		30000
Gain		5250

 

Gain= (fair value given – book value given) × (cash received ÷ total fair value received)= ($72,000 – $30,000) × ($9,000 ÷ $72,000)= $5250

 

fair value received = fair value given in an even exchange

Part 1

Fair value of new land = Fair value of old land + Cash given = 72000+14000 = $86000