Question

Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $15,000 (original cost of $34,000 less accumulated depreciation of $19,000) and a fair value of $9,600. Kapono paid $26,000 cash to complete the exchange. The exchange has commercial substance. Case B. Kapono Farms exchanged 100 acres of farmland for similar land. The farmland given had a book value of $530,000 and a fair value of $760,000. Kapono paid $56,000 cash to complete the exchange. The exchange has commercial substance.
Required:
a. What is the amount of gain or loss that Kapono would recognize on the exchange of the land?
b. What is the amount of gain or loss that Kapono would recognize on the exchange of the tractor?
c. Assume the fair value of the old tractor is $20,000 instead of $9,600. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new tractor?

Answer 1

Answer:

a. Gain on sale of land  = $230,000

b. Loss on the exchange of the tractor = $5,400

c-1. Gain on Exchange of the tractor = $5,000

c-2. Initial value of new tractor = $35,600

Explanation:

a. What is the amount of gain or loss that Kapono would recognize on the exchange of the land?

This can be determined as follows:

Details                                       Amount $    

Fair value of land                       760,000

Book value of land                   (530,000)

Gain (loss) on sale of land       230,000

b. What is the amount of gain or loss that Kapono would recognize on the exchange of the tractor?

This can be determined as follows:

Details                                       Amount $    

Original Cost of Tractor                34,000

Accumulated Depreciation         (19,000)  

Book Value of Tractor                  15,000

Therefore, we have:

Loss on Exchange of the tractor = Fair value - Book Value of Tractor = $9,600 - $15,000 = $5,400

c. Assume the fair value of the old tractor is $20,000 instead of $9,600. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new tractor?

c-1. Calculation of the amount of gain or loss that Kapono would recognize on the exchange

From part b, we have:

Book Value of Tractor = $15,000

And, we have:

Fair Value = $20,000

Therefore, we have:

Gain on Exchange of the tractor = Fair value - Book Value of Tractor = $20,000 - $15,000 = $5,000

c-2. Calculation of the initial value of the new tractor

This can be determined as follows:

Initial value of new tractor = Fair Value of tractor given + Cash paid = $9,600 + $26,000 = $35,600