Question

Case A. 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?

Answer 1

$ 1,000 loss

Step-by-step explanation:

Items of PPE are to be carried at fair value where the fair value is lower than the book value. For this transaction in which Kapono Farms has an old tractor carried at a book value of $12,000 (cost less accumulated depreciation) and the fair value is $9,000, the asset is to be written down to the fair value first. hence the company records a loss of $3,000 ($12,000 - $9,000) prior to the exchange. Hence the true value of the exchange is made of two component namely; the value of the asset ($9,000) and the cash paid ($20,000). This adds up to $29,000. Where the cost of the new model of the asset is same as the cost of the old asset ($28,000)

Therefore, Gain/(loss) = 28000 - 29000

= ($1,000)

A loss of $1,000 will be recognized on exchange.