Question

Horton Stores exchanged land and cash of $5,000 for similar land. The book value and the fair value of the land given up were $90,000 and $100,000, respectively. Assuming that the exchange has commercial substance, Horton would record land-new at and record a gain/(loss) of:

Answer 1

Answer:

Land-new = $105,000 ; $10,000 gain

Explanation:

Given the following :

Exchange fee = land + $5000 cash

Book value of land given up = $90,000

Fair value of land given up = $100,000

The book value refers to the value of the land as stated in the balance sheet of the company, However, the fair value is the market price or value of an asset, which is also the price a buyer will pay for such asset.

Therefore, since the fair value is greater than the book value, that translates into a profit;

Fair value of land - book value of land

$100,000 - $90,000 = $10,000 gain

The land-new = Fair value of old land + the $5000 cash received

Land-new = $100,000 + $5,000 = $105,000