Question

On January 10, 2016, a fire destroyed a warehouse owned by NP Company. NP’s adjusted basis in the warehouse was $590,000. On March 12, 2016, NP received a $770,000 reimbursement from its insurance company. In each of the following cases:

A. Determine NP’s recognized gain on this property disposition. Assume that NP would elect to defer gain recognition when possible. NP’s board of directors decided not to replace the warehouse.

B. Determine NP’s recognized gain on this property disposition. Assume that NP would elect to defer gain recognition when possible. On January 2, 2018, NP paid $780,000 to acquire a warehouse to store its inventory.

C. Determine NP’s recognized gain on this property disposition. Assume that NP would elect to defer gain recognition when possible. On February 8, 2019, NP paid $780,000 to acquire a warehouse to store its inventory.

Answer 1

A.

If Board of director decided not to replace the ware house. then,

The Realised gain on this warehouse is =

Gain = Amount Realised - Adjusted Basis

Realised Gain on warehouse = $7,70,000 - $5,90,000

Gain = $1,80,000

B.

Acquire a new house in $7,80,000 on Jan 2,2018.

Therefore,

Realised Gain = $7,70,000 - $5,90,000

Realised Gain = $1,80,000

Recognised Gain = $0.

Howerver, here he recieved $7,70,000 and invested his amount in acquiring new property. So, her realised gain is postponed.

Replacement of warehouse-

= Cost of new warehouse - Postponed gain

= $7,80,000 - $1,80,000

= $6,00,000

C.

Acquire a new house in $7,80,000 on Feb 8,2019.

Therefore,

Realised Gain = $7,70,000 - $5,90,000

Realised Gain = $1,80,000

Recognised Gain = $0.

Howerver, here he recieved $7,70,000 and invested his amount in acquiring new property. So, her realised gain is postponed.

Replacement of warehouse-

= Cost of new warehouse - Postponed gain

= $7,80,000 - $1,80,000

= $6,00,000

Thanks