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The Tinsley Company exchanged land that it had been holding for future plant expansion for a...

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 $35,000. According to an independent appraisal, the land currently is worth $84,000. Tinsley paid $17,000 in cash to complete the transaction. Required: 1. What is the fair value of the new parcel of land received by Tinsley assuming the exchange has commercial substance? 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 $27,000 in the exchange, and the exchange lacks commercial substance.

Solutions

Expert Solution

Answer 1:

Fair value of new parcel of land assuming the exchange has commercial substance = Fair value of old land exchanged + Cash given = $84,000 + $17,000 = $101,000

Answer 2:

New parcel of land has to be accounted for at fair value of $101,000 (as calculated above)

Old Land (asset) account has to be credited at its carrying value of $35,000

Gain to be accounted for = Fair value of old land - carrying value of old land

= $84,000 - $35,000 = $49,000

Journal entry to record the exchange assuming the exchange has commercial substance ( in the books of The Tinsley Company):

Answer 3:

If the exchange lacks commercial substance, book value is used to record the exchange transaction. Further as boot is paid, no gain is recognized.

Hence new land parcel will be recorded at = carrying value of old land + cash given = $35,000 + $17,000 = $52,000

Journal entry to record the exchange assuming the exchange lacks commercial substance:

Answer 4:

In this case, fair value of new parcel of land received = $84,000 - $27,000 = $57,000

Let us calculate cash received as percentage of fair value total assets received = [$27,000 / ($27,000 + $57,000) = 32.14%

As per GAPP, If cash is more than 25% of the total assets received, the exchange is treated as a monetary exchange and the entire difference between the fair value and carrying amount of the old asset is recognized as gain.

Gain = Fair value of asset given - carrying value of asset given = $84,000 - $35,000 = $49,000

Journal entry to record the exchange except that Tinsley received $27,000 in the exchange, and the exchange lacks commercial substance:

ekkarill92 answered 1 year ago
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