Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor

Question

Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $12,000 (original cost of $28,000 less accumulated depreciation of $16,000) and a fair value of $9,000. Kapono paid $20,000 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 tractor?

Assume the fair value of the old tractor is $14,000 instead of $9,000.

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 tractor?

Case B. Kapono Farms exchanged 100 acres of framland for similar land. The farmland given had a book value of $500,000 and a fair value of $700,000. Kapono paid $50,000 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 $400,000 instead of $700,000.

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?

Repeat requirement 1 of case B, assuming that the exchange lacked commercial substance.

3.1 What is the amount of gain or loss that Kapono would recognize on the exchange?

3.2 What is the initial value of the new Land?

Explanation / Answer

Solution for case A:

1.1 Recorded cost of the new tractor = 20000+9000 = 29000

Less: old machine book value and cash paid = 12000+20000 = 32000

Loss = 3000

1.2 Initial value of new tractor = fair value of old tractor + cash given = 9000+20000 = 29000

2.1 Recorded cost of the new tractor = 20000+14000 = 34000

Less: old machine book value and cash paid = 12000+20000 = 32000

Gain = 2000

2.2 Initial value of new tractor = fair value of old tractor + cash given = 14000+20000 = 34000

Solution for case B:

1.1 Recorded cost of the new land = 50000+700000 = 750000

Less: old land book value and cash paid = 500000+50000 = 550000

Gain = 200000

1.2 Initial value of new land = fair value of old land + cash given = 700000+50000 = 750000

2.1 Recorded cost of the new land = 50000+400000 = 450000

Less: old land book value and cash paid = 500000+50000 = 550000

Loss = 100000

2.2 Initial value of new land = fair value of old land + cash given = 400000+50000 = 450000

3.1 When an exchange lacks commercial substance losses are recognized immediately but gains are deferred. Since there was a gain in requirement 1, no gain would be recognized.

3.2 Recorded cost when exchange has commercial substance = 750000

Less: deferred gain = 200000

The initial value of the new Land = 550000

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