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During the current year, the Harlow Corporation, which specializes in commercial construction,...

Question:

During the current year, the Harlow Corporation, which specializes in commercial construction, has the following property transactions:

a. In April, a tornado damages a crane and a dump truck at one of its construction sites. The crane was acquired in 2010 for $120,000 and has an adjusted basis of $39,650. The dump truck was acquired in 2008 for $70,000 and has an adjusted basis of $33,880. The insurance company reimburses Harlow $35,000 for the crane and $42,000 for the dump truck. The company decides not to replace the dump truck and uses the insurance proceeds to purchase a new crane for $110,000.

b. The company trades a road grader with a fair market value of $72,000 for a bulldozer worth $60,000. Harlow receives $12,000 in the exchange. The road grader originally cost $90,000 and has an adjusted basis of $50,000. The bulldozer cost $85,000, and its adjusted basis is $37,000.

c. A fire destroys the company's supply warehouse. The warehouse originally cost $300,000 and has an adjusted basis of $200,000. Its fair market value before the fire was $250,000. The insurance company pays Harlow $230,000, which it uses to acquire a warehouse costing $280,000.

d. The city of PeaceDale condemns land that Harlow had acquired in 1979 for $22,000 and held as an investment. The city pays Harlow the $195,000 fair market value of the land. Harlow uses the proceeds to acquire a commercial office park for $350,000.

e. Harlow sells an automobile used by its president for business purposes for $10,000 to a local car dealership. The car originally cost $32,000, and its adjusted basis is $15,000. The company had an agreement to replace the automobile with a customized four-wheel-drive vehicle from a company that specializes in custom cars. However, the day the company sells the automobile, it is informed that the custom car company will not be able to deliver the vehicle for at least 10 weeks. Harlow terminates its contract with the custom car company and buys a new automobile from the local car dealership for $55,000.

Determine the realized and recognized gain or loss on each of Harlow's property transactions and the basis of any property acquired in each transaction.

Recognized Gain vs Realized Gain:

Recognized gain is profit made when asset or investment is sold at an amount higher than it was originally paid. On the other hand, realized gain is the amount of money made from a sale.

Answer and Explanation: 1

A.

DUMP TRUCK Amount in $
Amount realized (Insurance proceeds) $42,000
Adjusted basis ($33,880)
Realized Gain $8,120
Recognized Gain $8,120
Deferred Gain $0

CRANE Amount in $
Amount realized (Insurance proceeds) $35,000
Adjusted basis $39,650
Realized Loss ($4,650)
Recognized Loss $4,650
Deferred Loss $0

B.

Amount Realized (Bulldozer + cash) $72,000 ($60,000-$50,000)+$12,000
Adjusted basis ($50,000)
Realized Gain $22,000
Recognized Gain (Cash boot received) ($12,000)
Deferred Gain $10,000
Deferred Loss $0

C.

Amount Realized (Insurance proceeds) $230,000
Adjusted basis ($200,000)
Realized Gain $30,000
Recognized Gain (Cash boot received) $0
Deferred Gain $30,000
Deferred Loss $0

The basis of the new warehouse is $250,000 ($280,000 - $30,000).

D.

Amount Realized (Condemnation proceeds) $195,000
Adjusted basis ($22,000)
Realized Gain $173,000
Recognized Gain (Cash boot received) $0
Deferred Gain $173,000
Deferred Loss $0

The basis of office park is $177,000 ($350,000 - $173,000).

E.

Amount Realized $10,000
Adjusted basis ($15,000)
Realized Loss $5,000
Recognized Loss $0
Deferred Loss $5,000
Deferred Loss $0

Fair market value of new automobile $55,000
Add: Deferred Loss $5,000
Basis in new automobile $60,000


Learn more about this topic:

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Capital Gains Treatments: Definition & Advantages

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Chapter 12 / Lesson 3
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Capital gains include income from any sold stock, but there are certain tax advantages to treating stocks as a long-term investment. Learn the difference between short- and long-term capital gains and why those differences matter with regard to profit.


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