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6 July, 05:22

Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $18,000 (original cost of $40,000 less accumulated depreciation of $22,000) and a fair value of $10,200. Kapono paid $32,000 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 $26,000 instead of $10,200. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new tractor?

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Answers (1)
  1. 6 July, 06:46
    0
    Loss on exchange is - $7,800

    initial value of tractor is $42,200

    Gain on exchange is $8000

    Initial value of tractor is $58,000

    Explanation:

    The amount of gain or loss recognizable on the exchange is the difference between the fair value of the old asset and its book value

    Loss on the asset=$10,200-$18,000=-$7,800

    Initial value of the new tractor=fair value of the old tractor+cash payment

    Initial value of the new tractor=$32,000+$10,200=$42,200

    If fair value were $26,000

    gain on the exchage=$26,000-$18,000=$8,000

    Initial value of the new tractor=$32,000+$26,000=$58,000
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