7. Problem 10-8 Nonmonetary exchange [LO10-6] Case A. Kapono Farms exchanged an
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Question
7.
Problem 10-8 Nonmonetary exchange [LO10-6]
Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $20,000 (original cost of $44,000 less accumulated depreciation of $24,000) and a fair value of $10,600. Kapono paid $36,000 cash to complete the exchange. The exchange has 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 tractor?
What is the amount of gain or loss that Kapono would recognize on the exchange?
Case B. Kapono Farms exchanged 100 acres of farmland for similar land. The farmland given had a book value of $580,000 and a fair value of $860,000. Kapono paid $66,000 cash to complete the exchange. The exchange has commercial substance.
What is the amount of gain or loss that Kapono would recognize on the exchange?
What is the amount of gain or loss that Kapono would recognize on the exchange?
What is the amount of gain or loss that Kapono would recognize on the exchange?
Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $20,000 (original cost of $44,000 less accumulated depreciation of $24,000) and a fair value of $10,600. Kapono paid $36,000 cash to complete the exchange. The exchange has commercial substance.
Explanation / Answer
Case A: (1.1) given Book value left = $20,000 and fair value of asset = $10,600 Hence the loss on sale of asset to be recognized = $20000 - $10600 = $9400 (1.2) Initial cost of New tractor = $10,600 + $36000 = $46600 Assming fai value = $30,000 then (2.1) given Book value left = $20,000 and fair value of asset = $30,000 Hence the gain on sale of asset to be recognized = $30000 - $20000 = $10000 (2.2) Initial cost of New tractor = $30,000 + $36000 = $66000 Case B: given had a book value of $580,000 and a fair value of $860,000. Kapono paid $66,000 cash to complete the exchange (1.1) gain on exchange = $8,60,000 - $5,80,000 = $2,80,000 (1.2) Initial cost of Land = $8,60,000 + $66000 = $9,26,000 Assuming fair value of the farmland given is $464,000 (2.1) Loss on exchange = $4,64,000 - $5,80,000 = $1,16,000 (2.2) initial value of the new land = $4,64,000 + $66,000 = $5,30,000 assuming that the exchange lacked commercial substance. If the transaction does not have commercial substance, or the fair value of neither the asset received nor the asset given up can be measured reliably, then the asset acquired is valued a the carrying amount of the asset given up. Case B :(3.1) amount of gain or loss that Kapono would recognize on the exchange Fair value cannot be measured ,Hence cant be determined. (3.2) initial value of the new land when no commercial substance exists. Hence, => asset acquired is valued a the carrying amount of the asset given up Total cost of new land = $580,000
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