Smith and Jones each own tracts of land. Because of the location of their curren

Question

Smith and Jones each own tracts of land. Because of the location of their current operations, each would prefer to have the other's land. Smith and Jones agree to exchange tracts. Jones pays Smith $36,000 based upon the following data.


Smith Land Jones Land
Original Cost $270,000 $280,000
Appraised fair value at date of exchange $300,000 $264,000


Instructions
(a) Prepare the journal entry to record the exchange on Smith's books, assuming the transaction has commercial substance.
(b) Prepare the journal entry to record the exchange on Smith's books, assuming the transaction does not have commercial substance.
(c) Prepare the journal entry to record the exchange on Jones’s books, assuming the transaction has commercial substance.
(d) Prepare the journal entry to record the exchange on Jones’s books, assuming the transaction does not have commercial substance.

Explanation / Answer

(a)    For simth's books exchange There is commercial substance then we consider the gain,                         Gain = Fair value - Book value                                 = $300,000 - $270,000                                 = $30,000 Date Particulars Debit($) Credit($) Land(Fair vallue) 330,000        Gain on exhange 30,000        Land(Cost) 270,000 (b)    If does not cosider the commercial substance then, simth does not consider the gain Date Particulars Debit($) Credit($) Land(Fair vallue) 270,000        Land(Cost) 270,000 (c)       If Jones conisder the commercial substance then, profit is                      Gain      = Fair value - Book cost                                   = 280,000 - 264,000                                   = 16,000 Date Particulars Debit($) Credit($) Land(Fair vallue) 316,000        Cash 36,000        Gain on exhange 16,000        Land(Cost) 264,000 (d)       If jones not consider the commercial substance then, he does not consider the gain. Date Particulars Debit($) Credit($) Land(Fair vallue) 300,000        Cash 36,000        Land(Cost) 264,000         Date Particulars Debit($) Credit($) Land(Fair vallue) 330,000        Gain on exhange 30,000        Land(Cost) 270,000

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