A company owns a piece of land that originally cost $10,000 and has a fair marke

Question

A company owns a piece of land that originally cost $10,000 and has a fair market value of $8,000. It is exchanged alongwith $5,000 cash for another piece of land having a fair value of $13,000. The exchange had commercial substance. The proper journal entry to record this transaction is:

A. Land (new) $15,000
Land (old) $10,000
Cash $5,000

B. Land (new) $13,000
Loss on Exchange $2,000
Land $10,000
Cash $5,000

C. Land (new) $18,000
Land (old) $10,000
Cash $5,000
Gain $3,000

D. Land (new) $13,000
Retained Earnings $2,000
Land (old) $10,000
Cash $5,000

I believe the answer is B. ($10,000 + $5,000) - $13,000 = $2,000 Loss But then I looked at the commerical substance and think it could be C ($13,000 - $8,000 =) $5,000 - ($10,000 - $8,000 = ) $3,000 Gain. With commerical substance a Gain must be recorded. What do you think?

Explanation / Answer

B. Land (new) Dr $13,000 Loss on Exchange Dr $2,000 Land Cr $10,000 Cash Cr $5,000 To remove all accounts related to the old Land and cash paid, set up the new Land at its fair value, and record the balancing loss.

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