o Cricket 1:26 @ 100% . Your client, Covina Real Estate Holding, Inc (CREH), pur
ID: 2452566 • Letter: O
Question
o Cricket 1:26 @ 100% . Your client, Covina Real Estate Holding, Inc (CREH), purchased some land 10 years ago for $25,000, intending to build a new office building For a number of reasons, the office building was not constructed. The land is currently worth $300,000 Recently, the decision to construct the office building is being reconsidered, but in a different city. There is a 5-acre lot in the other city that would be a desirable location. It has a fair market value of $400,000. The CEO of CREH, Stephen Bradford, wants to acquire the 5-acre lot be exchanging their piece of property plus $100,000 cash. The other owner has agreed to accept the land and cash in exchange for the 5-acre lot. Stephen does not know the appropriate way to record the acquisition of the new lot. He is also uncertain how this transaction will be reported on the corporate tax return. He has engaged you to advise him on both ssues Please answer the question regarding both the accounting and tax treatment of the land acquisition. The answer will consist of two sections, one explaining the accounting treatment and one explaining the tax treatmentExplanation / Answer
Accounting Treatment of land acquisition:
(5-acre)New Land Account Dr.$400000
To cash Account $100000
To Gain on exchange of Land $275000
To old Land $25000
(Being new 5acre land is exchanged with old land BV of $300000 and additionally cash paid of $100000)
Note: Gain on exchange of land = fair value - Book value
= $300000 - $25000
= $275000
Tax Treatment of land acquisition:
There will be Taxable long term capital gain of $275000 , because old land of $25000 purchased 10 years ago with FV of $300000 ,now exchanged it to with new 5 acre land worth $400000
Gain = fair value - Book value
= $300000 - $25000
= $275000
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