Chapter 10, Problem 10.18E

(1)

To determine

Nonmonetary Exchange

Exchange of non-monetary assets for another non-monetary asset is known as nonmonetary exchange.

Exchange has commercial substance:

If an exchange (Example: exchange of land for another non-monetary asset other than land) is likely to have a change in the future cash flows, then it is known as exchange has commercial substance. In this case, an exchange of non-monetary assets, which have commercial substance, is recorded at its fair value, and then resulted gain or loss must be recognized by determining the difference between the fair value and book value.

Exchange lacks commercial substance:

If an exchange (Example: exchange of land for another land) is expected that it will not change the future cash flows, then such exchange is known as exchange lacks commercial substance. In this case, an exchange lacks commercial substance; therefore new non-monetary asset would be valued at the book value of the old non-monetary asset.

To determine: The fair value of the new parcel land, which is received by Company T.

Explanation of Solution

This is an exchange which has commercial substance. Thus, the fair value of new land is equivalent to the sum of fair value of old land and amount of cash paid in addition to the exchange.

$\begin{array}{c}\text{Fair value of the new parcel land = }\left[\begin{array}{l}\text{Fair value of the new parcel land+}\\ \text{Cash received in addition}\end{array}\right]\\ =\$72,000+\$14,000\\ =\$86,000\end{array}$

Hence, the fair value of the new parcel land is $86,000.

(2)

To determine

To prepare: The journal entry, to record the exchange of old land for new parcel land, which has commercial substance.

Explanation of Solution

Prepare an entry to record the exchange of old land for new land, which has commercial substance.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Land – New		86,000
	Cash			14,000
	Land  – Old			30,000
	Gain on trade-in (Balancing figure)			42,000
	(To record the exchange of old land for new land, which has commercial substance)

Table (1)

• Land is an asset account; purchase of new land is debited to increase its value by $86,000.
• Cash is an asset account, which is decreased by $14,000. Hence, it is credited by $14,000.
• Old land is exchanged for new land. Hence, old land is credited to decrease its balance by $30,000 (original cost).
• Value of new land received is higher than the fair value of old land plus payment of cash by $42,000. Hence, gain on trade in account is credited with $42,000.

(3)

To determine

To prepare: The journal entry, to record the exchange of old land for new parcel land, assumes that the exchange lacks commercial substance.

Explanation of Solution

Prepare an entry to record the exchange of old land for new land,assume that the exchange lacks commercial substance.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Land – New		44,000
	Cash			14,000
	Land  – Old			30,000
	(To record the exchange of old land for new land, which lacks commercial substance)

Table (2)

This exchange lacks commercial substance. Thus, the fair value of new land is equivalent to the sum of book value of old land and amount of cash paid in addition to the exchange.

$\begin{array}{c}\text{Fair value of the new parcel land = }\left[\begin{array}{l}\text{Book value of the new parcel land+}\\ \text{Cash received in addition}\end{array}\right]\\ =\$30,000+\$14,000\\ =\$44,000\end{array}$

• Land is an asset account; purchase of new land is debited to increase its value by $44,000.
• Cash is an asset account, which is decreased by $14,000. Hence, it is credited by $14,000.
• Old land is exchanged for new land. Hence, old land is credited to decrease its balance by $30,000 (original cost).

(4)

To determine

To prepare: The journal entry, to record the exchange of old land for new parcel land, which lacks commercial substance.

Explanation of Solution

Prepare an entry to record the exchange of old land for new land, which lackscommercial substance.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Land – New (Balancing figure)		22,500
	Cash		18,000
	Land  – Old			30,000
	Gain on trade-in			10,500
	(To record the exchange of old land for new land, which lacks commercial substance)

Table (3)

Working note:

Calculate the gain on trade in.

$\begin{array}{c}\text{Gain on trade in =}\left[\begin{array}{l}\left(\begin{array}{l}\text{Fair value of given land}-\\ \text{Book value of given land}\end{array}\right)\times \\ \left(\frac{\text{Cash received}}{\text{Total fair value of land received}}\right)\end{array}\right]\\ =\left[\left(\$72,000-\$30,000\right)\times \left(\frac{\$18,000}{\$72,000}\right)\right]\\ =\left[\$42,000\times 0.25\right]\\ =\$10,500\end{array}$

• Land is an asset account; purchase of new land is debited to increase its value by $22,500.
• Cash is an asset account, which is increased by $18,000. Hence, it is debited by $18,000.
• Old land is exchanged for new land. Hence, old land is credited to decrease its balance by $30,000 (original cost).
• Value of new land received plus cash received is higher than the fair value of old land. Hence, gain on trade in account is credited with $10,500.