Question

Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $19,500 (original cost of $43,000 less accumulated depreciation of $23,500) and a fair value of $10,500. Kapono paid $35,000 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? What is the initial value of the new tractor?
2. Assume the fair value of the old tractor is $29,000 instead of $10,500. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new tractor?

Case B. Kapono Farms exchanged 100 acres of farmland for similar land. The farmland given had a book value of $575,000 and a fair value of $850,000. Kapono paid $65,000 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? What is the initial value of the new land?
2. Assume the fair value of the farmland given is $460,000 instead of $850,000. 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 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

ANSWER

Case A:

1. Loss on exchange = Book value - fair value = 19,500 - 10,500= $9,000

Initial value of the new tractor = cash paid+fair value of the old tractor = 35,000 +10,500= 24,500

2. Gain on exchange = Fair value - book value = 29,000 - 19,500 = $9,500

Initial value of the new tractor = cash paid+fair value of the old tractor = 35,000 +29,000 = 64,000

Case B:

1. Gain on exchange = Fair value - book value = 850,000- 575,000 = $275,000

Initial value of new land = fair value+cash paid = 850,000+65,000 = 915,000

2. Loss = Book value - fair value = 575,000 - 460,000 = 115,000

Initial value of new land = fair value+cash paid = 460,000 +65,000 = 525,000

3. As the exchange lacked commercial substance there will be no gain or loss that Kapono would recognize on exchange.

Initial value of new land = book value + cash = 575,000 +65,000 = $640,000

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