The Tinsley Company exchanged land that it had been holding for future plant exp
ID: 2573265 • Letter: T
Question
The Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the land currently is worth $72,000. Tinsley paid $14,000 in cash to complete the transaction. Required 1. What is the fair value of the new parcel of land received by Tinsley assuming the exchange has commercial substance? 2. Prepare the journal entry to record the exchange assuming the exchange has commercial substance. 3. Prepare the journal entry to record the exchange assuming the exchange lacks commercial substance 4. Prepare the journal entry to record the exchange except that Tinsley received $18,000 in the exchange, and the exchange lacks commercial substanceExplanation / Answer
Answer to Question No. 1
In the given case fair value of the new parcel of land received by Tinsley has commercial substance. Hence Fair value of the assets exchanged will be the fair value of the new parcel of the land.So $72,000 will be the fair value of the new parcel of the land. Further any expensidture incurred on this transactions will be also added with the cost of new parcel of the land. In the given problem $14,000 is the expenditure is incurred on transfer, and the same will be added with the cost of new land.
Answer to Question No. 2
New Land Debit 86,000
Old Land Credit 30,000
Gain Credit 42,000
Cash Credit 14,000
Since the transaction is having commercial substance, difference of book value and fair value will be recognised as gain on transfer. Cost incurred in this transaction will be added as the cost of the new land.
Answer to Question No. 3
New Land Debit 44,000
Old Land Credit 30,000
Cash Credit 14,000
Since the transaction is not having commercial substance, difference of book value and fair value will not be recognised as gain on transfer. Cost incurred in this transaction will be added as the cost of the new land.
Answer to Question No. 4
In the given problem gain on the transfer of asset is
Fair value of the assets $72,000
Less: Book value of assets $30,000
Gain on asset transfer $42,000
Since transfer lack of commercial substance and boot received is more than 25% of the gain, Tinsley need to recognised part gain on this transaction.
Gain on Transactions
Cash Received/(Cash received+Fair value of the assets)*Gain
18000/(18000+72000)*42000
$8,400
Journal Entry
Cash Debit 18,000
Land new Debit 20,400
Land old Credit 30,000
Gain Credit 8,400
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