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Nonmonetary Exchange: Smith and Jones exchange land

Smith and Jones each owns tracts of land. Because of the location of their current operations, each would prefer to have the other's land. Smith and Jones agree to exchange tracts. Jones pays Smith $36,000 based upon the following data.

Smith Land Jones Land
Original Cost $270,000 $280,000
Appraised Fair Value $300,000 $264,000
at date of exchange.

a) Prepare the journal entry to record the exchange on Smith's books, assuming the transaction has commercial substance.
b) Prepare the journal entry to record the exchange on Smith's books, assuming the transaction does not have commercial substance.
c) Prepare the journal entry to record the exchange on Jones's books, assuming the transaction has commercial substance.
d) Prepare the journal entry to record the exchange on Jones's books, assuming the transaction does not have commercial substance.

Solution Preview

See the attached file.

Definitions

Commercial substance: Recognize gain or loss. Cost of asset received = fair value of asset surrendered + cash paid - cash received.

No Commercial substance: No gain or ...

Solution Summary

The solution clearly defines the difference between transactions with commercial substance as opposed to those with no commerical substance. Given the definitions, the solution presents the journal entries for both Smith and Jones to reflect the exchange of property.

$2.19