In: Accounting
Nick had a business building destroyed in a fire. The old building was purchased for $375,000 and $60,000 of depreciation deductions had been taken. Although the old building had a fair market value of $425,000 at the time of the fire, his insurance proceeds were limited to $400,000. Nick found qualified replacement property which he acquired six months later for $390,000.
Realized Gain/Loss |
Recognized Gain/Loss |
Basis in New Asset |
Katie traded computer equipment used in her business to a computer dealer for some new computer equipment. Katie originally purchased the computer equipment for $15,000 and it had an adjusted basis of $11,000 at the time of the exchange. The computer equipment was worth $12,000 at the time of the exchange. Katie also received a used copier worth $2,000 in the transaction.
Realized Gain/Loss |
Recognized Gain/Loss |
Basis in New Asset |
Holiday exchanged an office building used in its business for a rental house. Holiday originally purchased the building for $80,000 and it had an adjusted basis of $53,000 at the time of the exchange. The rental house had a fair market value of $62,000. Holiday also received $7,000 of cash in the transaction.
Realized Gain/Loss |
Recognized Gain/Loss |
Basis in New Asset |
Brett sold land he had held for 8 years valued at $210,000 in Year 1. His original basis in the land was $180,000. For the land, Brett received $60,000 in cash in the current year and a note providing $150,000 in the following year.
Year |
Realized Gain/Loss |
Recognized Gain/Loss |
Basis in New Asset |
Year 1 |
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Year 2 |
solution :
given that
Nick had a business building destroyed in a fire.
The old building was purchased for $375,000 and $60,000 of
depreciation deductions had been taken.
also given that
Although the old building had a fair market value of $425,000 at
the time of the fire, his insurance proceeds were limited to
$400,000.
Nick found qualified replacement property which he acquired six
months later for $390,000.
Adjusted basis of the old building,} =Cost of the old building
—Depreciation which has been destroyed in fire = $375,000 - $60,000
=$315,000 Insurance proceeds = $400,000.
Realized gain = Insurance proceeds - Adjusted basis of destroyed
building =$400,000 - $315,000 = $85, 000
Hence, nicks realized gain is $85,000.
Recognized gain = Lower of realized gain or uninvested insurance
proceeds = Realized gain (or) ($400, 000— $390, ODD) =$85, 000
(or)$10,000 =$10,000
therefore
nicks recognized gain is $10,000.