Understanding the Land Exchange Transaction
Tinsley, a real estate developer, recently exchanged a parcel of land in a transaction for a more suitable parcel located farther from residential areas. The original cost of the land was $30,000, and an independent appraisal valued the current land at $72,000. To complete the exchange, Tinsley paid $14,000 in cash.
Questions:
1. What is the fair value of the new parcel of land received by Tinsley assuming the exchange has commercial substance?
2. How should the journal entry be prepared to record the exchange assuming the exchange has commercial substance?
3. How should the journal entry be prepared to record the exchange assuming the exchange lacks commercial substance?
4. What would be the journal entry if Tinsley received $9,000 in the exchange, and the exchange lacks commercial substance?
Answers:
Final answer:
The fair value of Tinsley's new land is $44,000. The journal entries for the exchange vary based on whether the exchange has commercial substance or not and whether cash is received.
Explanation:
The fair value of the new parcel of land received by Tinsley would be the sum of the value of the old land ($30,000 as according to the original cost) plus the cash paid ($14,000). Therefore, the total fair value is $44,000.
Journal entry for the exchange with commercial substance is:
- Land (new parcel) Debit $44,000
- Land (old parcel) Credit $30,000
- Cash Credit $14,000
If the exchange lacks commercial substance and no cash is received, the journal entry would be similar:
- Land (new parcel) Debit $44,000
- Land (old parcel) Credit $30,000
- Cash Credit $14,000
But if cash of $9,000 is received in the exchange that lacks commercial substance, there's a realization of gain:
- Land (new parcel) Debit $35,000
- Cash Debit $9,000
- Land (old parcel) Credit $30,000
- Gain on exchange of Land Credit $14,000