Smith and Jones each owns tracts of land. Because of the location of their curre

ID: 2442352 • Letter: S

Question

Smith and Jones each owns 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 $300,000 $264,000
at date of exchange.

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

According to the given information, Book value of Smith Land = $270,000 Fair value of Smith Land = $300,000 Book value of Jones Land = $280,000 Fair value of Jones Land = $264,000 a) Gain recognized on exchange of Smith Land = Fair value - Book Value = $300,000 - $270,000 = $30,000 Loss recognized on exchange of Jones Land = Fair value - Book value = $264,000 - $280,000 = ($16,000) The journal entry would be reported as: Particulars Debit Credit Land $264,000 Cash received $36,000 Gain on exchange $30,000 Land $270,000 b) Since the transaction lacks commercial substance and some cash is received in exchange, it may immediately recognize a portion of gain. CASh received / (Cash received + Fair value of the asset received) * Total gain = Recognized gain $36,000 / ($36,000 + $264,000) * $30,000 = $3,600 Becasue Smith recognizes only a gain of $3,600 on this transaction, it defers the remaining ($30,000 - $3,600) = $26,400 and reduces the basis of the Jones land. Fair value of Jones Land = $264,000 (-) Gain deferred = $26,400 -------------------------------------- Basis of Jones Land = $237,600 ------------------------------------- Particulars Debit Credit Cash $36,000 Land $237,600 Land $270,000 Gain on Disposal $3,600 c) Recording the journal entry in the books of Jones that has commercial substance. Particulars Debit Credit Land $300,000 Cash paid $36,000 Land $264,000 d) Recording the journal entry in the books of Jones that lacks commercial substance. Book value of the Jones Land = $280,000 (+) Cash paid = $36,000 ----------------------------------------- Basis of Smith Land = $316,000 ----------------------------------------- Particulars Debit Credit Land $316,000 Cash paid $36,000 Land $280,000 Particulars Debit Credit Land $300,000 Cash paid $36,000 Land $264,000 d) Recording the journal entry in the books of Jones that lacks commercial substance. Book value of the Jones Land = $280,000 (+) Cash paid = $36,000 ----------------------------------------- Basis of Smith Land = $316,000 ----------------------------------------- Particulars Debit Credit Land $316,000 Cash paid $36,000 Land $280,000

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