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 $56,250. According to an independent appraisal, the land currently is worth $135,000. Tinsley paid $20,000 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 $24,000 in the exchange, and the exchange lacks commercial substance.

Answer and Explanation:

1. The computation of fair value of the new parcel of land is shown below:-

Fair value of the new parcel of land received = Appraisal value + Cash paid

= $135,000 + $20,000

= $155,000

2. To record the exchange assuming the exchange lacks commercial substance.

Land new parcel Dr, $155,000

      To Land $56,250

      To Cash $20,000

      To Gain on exchange $78,750

(Being the exchange of land which was commercial substance is recorded)

3. To record the exchange assuming the exchange lacks commercial substance

Land-New parcel Dr, $135,000

    To Land $56,250

     To Cash $78,750

(Being the exchange of land which lacks commercial substance is recorded)

4. To record the Journal entry assuming the exchange lacks commercial substance

Land-New parcel Dr, $46,189

Cash Dr, $24,000

    To Land $56,250

     To Gain on exchange $13,939

($135,000 - $56,250) × ($24,000 ÷ $135,000)

(Being the exchange of land which lacks commercial substance is recorded)

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