Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $16,500 (original cost of $37,000 less accumulated depreciation of $20,500) and a fair value of $9,900. Kapono paid $29,000 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 $545,000 and a fair value of $790,000. Kapono paid $59,000 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? What is the initial value of the new tractor?
b. Assume the fair value of the old tractor is $23,000 instead of $9,900. 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. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new land?
d. Assume the fair value of the farmland given is $436,000 instead of $790,000. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new land?
e. Assume that the exchange lacked commercial substance. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new land?

Kapono Farms

Case A:

a. The loss that Kapono would recognize on the exchange is:

= $6,600.

The initial value of the new tractor is:

= $38,900.

b. The gain that Kapono would recognize on the exchange is:

= $6,500.

The initial value of the new tractor, if cash payment of $29,000 was made, would be:

= $52,000.

Case B:

c. The amount of gain that Kapono would recognize on the exchange is:

= $245,000.

The initial value of the new land is:

= $790,000.

d. The amount of the loss that Kapono would recognize on the exchange of land is:

= $109,000.

The initial value of the new land is $495,000, if payment of $59,000 is made.

e. If the exchange lacked commercial substance, there is no gain or loss.

The initial value of the new land would be the book value of the old farmland, which is:

= $545,000.

Explanation:

a) Data and Calculations:

Book value of old tractor = $16,500     $16,500

Fair value of old tractor =       9,900      23,000

Loss from the exchange =   $6,600       -6,500

Value of new tractor

Fair value of old tractor =     $9,900   $23,000

Cash payment to complete 29,000     29,000

Value of new tractor          $38,900   $52,000

Case B:

Book value of farmland = $545,000   $545,000

Fair value of farmland =      790,000     436,000

Gain from exchange =      $245,000   $109,000

Value of New Farmland:

Fair value of old farmland $790,000  $436,000

Cash payment to complete   59,000      59,000

Value of new farmland =   $849,000  $495,000

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