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. Required: 1. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new tractor? 2. Repeat requirement 1 assuming that the fair value of the old tractor is $14,000 instead of $9,000.

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Asked Jan 17, 2020
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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. Required: 1. What is the amount of gain or loss that Kapono would recognize on the exchange? What is the initial value of the new tractor? 2. Repeat requirement 1 assuming that the fair value of the old tractor is $14,000 instead of $9,000.

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Expert Answer

Step 1

When a fixed asset is exchanged for another fixed asset and the exchange has commercial substance, then such transaction is recorded at the fair value of the asset. In case the fair value of the acquired asset is not available, then the fair value of the asset forgone is considered.

In the given case the fair value of the asset forgone and the cash paid is available. Therefore, the cost of the asset acquired would be the fair value of the asset forgone.

Step 2

Case 1:Fair Value...

Accounting homework question answer, step 2, image 1
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