Accounting for Land Exchange: A Journey to Fair Value

What is the fair value of the new parcel of land received by Tinsley assuming the exchange has commercial substance?

How should the journal entries be prepared for the exchange assuming commercial substance and lacking commercial substance?

Answer:

The fair value of the new land parcel Tinsley received is $72,000. The journal entries depend on whether the exchange has commercial substance, and they adjust for any cash paid or received during the transaction.

The fair value of the new parcel of land received by Tinsley is determined by considering the original cost of the land given up and any additional cash paid during the exchange. In this case, the fair value of the new land is $72,000 based on an independent appraisal.

If the exchange has commercial substance, the journal entry to record the transaction would involve debiting the new land at its fair value, crediting the old land at its carrying amount, crediting cash for any amount paid, and recognizing a gain on the exchange.

Alternatively, if the exchange lacks commercial substance, the new land is recorded at the book value of the old land plus any cash paid, with no gain recognized. Different scenarios may arise based on the specifics of the exchange, such as receiving cash in the transaction.

Overall, the accounting treatment for land exchanges requires careful consideration of the fair value of the assets involved and whether the exchange has commercial substance to determine the appropriate journal entries.