Case B. Kapono Farms exchanged 100 acres of farmland for similar land. The farml

Question

Case B. Kapono Farms exchanged 100 acres of farmland for similar land. The farmland given had a book value of $520,000 and a fair value of $740,000. Kapono paid $54,000 cash to complete the exchange. The exchange has commercial substance. 1.1 What is the amount of gain or loss that Kapono would recognize on the exchange? 1.2 What is the initial value of the new land? Assume the fair value of the farmland given is $416,000 instead of $740,000. 2.1 What is the amount of gain or loss that Kapono would recognize on the exchange? 2.2 What is the initial value of the new land?

Explanation / Answer

Hi Dear Student,

1.1 Answer would be as follows

FV of New Asset(Land) Acquired - $740000
Less: BV of Old Land $520000
Less: Cash Paid $54000

Profit in Books: $166000

Or you can understand by Journal Entry:

New Land A/c Dr 740000
To Old Land 520000
To Cash 54000
To Profit 166000

1.2 Initial Value of the New Land would be FV of the property i.e. $740000
You can also refer above journal entry.

2.1 In this case Kapono will recognise Loss in his Books as follows

FV of New Asset(Land) Acquired - $416000
Less: BV of Old Land $520000
Less: Cash Paid $54000

Loss in Books: $158000

Or

you can understand by Journal Entry:

New Land A/c Dr 416000
Loss A/c Dr 158000
To Old Land 520000
To Cash 54000

2.2 Initial Value of the New Land would be FV of the property i.e. $416000
You can also refer above journal entry.

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