The Tinsley Company Land Exchange Journal Entries Explained
Overview
The Tinsley Company recently exchanged land it owned for a more suitable parcel located farther from residential areas. The original land was valued at $56,250, but an independent appraisal revealed its current value to be $135,000. Tinsley paid $20,000 in cash to complete the transaction. In this post, we will discuss the fair value of the new parcel of land received by Tinsley, prepare journal entries assuming the exchange has commercial substance and lacks commercial substance, and explore a scenario where Tinsley received $24,000 in the exchange.
1. Fair Value Calculation
Fair value of the new parcel of land received:
Appraisal value + Cash paid
= $135,000 + $20,000
= $155,000
2. Journal Entry - Commercial Substance
Land New parcel Dr, $155,000
To Land $56,250
To Cash $20,000
To Gain on exchange $78,750
3. Journal Entry - Lack of Commercial Substance
Land-New parcel Dr, $135,000
To Land $56,250
To Cash $78,750
4. Journal Entry - Commercial Substance with Receipt
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)
Final Answer:
The fair value of the new parcel of land received by Tinsley is $155,000. The journal entry to record the exchange depends on whether it has commercial substance or not. In a commercial substance exchange, there would be a gain, while in a lack of commercial substance exchange, there could be a loss. If Tinsley received $24,000 in the exchange, the journal entry would include a credit for Receipt on Exchange of Land.
Explanation:
1. The fair value of the new parcel of land received by Tinsley can be calculated as the sum of the cash paid and the fair value of the land given up: $20,000 + $135,000 = $155,000.
2. The journal entry to record the exchange assuming it has commercial substance would include debits for New Parcel Land, Land old parcel, Cash, and a credit for Gain on Exchange of Land.
3. The journal entry to record the exchange assuming it lacks commercial substance would include debits for New Parcel Land, Land old parcel, Cash, and a debit for Loss on Exchange of Land.
4. The journal entry to record the exchange with a $24,000 receipt and lacking commercial substance would include a credit for Receipt on Exchange of Land.
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 fair value of the new parcel of land received is $155,000. 2. Journal entry assuming commercial substance: Land New parcel Dr, $155,000; To Land $56,250; To Cash $20,000; To Gain on exchange $78,750. 3. Journal entry assuming lack of commercial substance: Land New parcel Dr, $135,000; To Land $56,250; To Cash $78,750. 4. Journal entry with $24,000 receipt and lack of commercial substance: Land-New parcel Dr, $46,189; Cash Dr, $24,000; To Land $56,250; To Gain on exchange $13,939.