A company owns a piece of land that originally cost $10,000 and has a fair market value of $8,000.It is exchanged along with $5,000 cash for another piece of land having a fair value of $13,000.The exchange had commercial substance.The proper journal entry to record this transaction is
A) Land (new)........................15,000
Land (old)......................10,000
Cash ...........................5,000
B) Land (new).......................13,000
Loss on Exchange .................2,000
Land ...........................10,000
Cash ...........................5,000
C) Land (new)........................18,000
Land (old).....................10,000
Cash ...........................5,000
Gain on Exchange ...............3,000
D) Land (new)........................13,000
Retained Earnings ................2,000
Land (old)......................10,000
Cash ...........................5,000

Question

Quizplus · Accepted Answer

Option B is the correct journal entry to record this transaction because it recognizes a loss on the exchange of $2,000. This is calculated by subtracting the fair value of the company's land ($8,000) from the fair value of the land received in exchange ($13,000). The entry also includes the cash paid of $5,000 and the original cost of the company's land of $10,000. This entry reflects the decrease in assets due to the loss on the exchange. Option A does not recognize the loss and Option C recognizes a gain on the exchange that does not exist. Option D incorrectly includes Retained Earnings in the entry.

A Company Owns a Piece of Land That Originally Cost