Easton Corporation and Weston Corporation are calendar year C corporations that

Question

Easton Corporation and Weston Corporation are calendar year C corporations that would like to swap construction equipment in a Section 1031 like-kind exchange. Easton Corporation’s construction equipment was purchased three years ago for $1,500,000 and it currently has an adjusted basis of $675,000. The construction equipment is encumbered by a purchase money loan that has a current balance of $275,000. The fair market value of Easton’s construction equipment is $800,000. Weston Corporation’s construction equipment was purchased two years ago for $1,000,000 and it currently has an adjusted basis of $600,000. The construction equipment is encumbered by a purchase money loan that has a current balance of $200,000. The fair market value of Weston’s construction equipment is $700,000. As part of the Section 1031 like-kind exchange, each corporation would assume the other corporation’s debt on the construction equipment. a. To economically balance the exchange, which corporation must pay cash boot to the other corporation and how much cash boot must be paid? Please show your work and explain your calculations. (2 points) b. Assuming the cash boot calculated in Part a above is paid, what is the amount of Easton Corporation’s realized gain or loss, what is the amount and character (if any) of Easton Corporation’s recognized gain or loss on the exchange, and what is Easton Corporation’s basis in the new construction equipment it received in the exchange? Please show your work and explain your calculations. (4 points) c. Assuming the cash boot calculated in Part a above is paid, what is the amount of Weston Corporation’s realized gain or loss, what is the amount and character (if any) of Weston Corporation’s recognized gain or loss on the exchange, and what is Weston Corporation’s basis in the new construction equipment it received in the exchange? Please show your work and explain your calculations. (4 points

Explanation / Answer

A]

Eastern Corporation:

Cost Of Machinery: $1500000.

Loan Remaining: $275000.

Western Corporation:

Cost of Machinery: $1000000.

Loan Remainig: $200000.

Therefore on the basis of laon amount to be paid, Eastern Corporation should pay an amount of $ 75000 to Western Corporation.

B]

Eastern Corporation had to pay an amount of $75000. But it only recognized an asset gain in terms of machinery used. Overall it incurred a loss as it's machine value got decreased by 500000 (From 1500000 to 1000000), also the market value of the machinery got decreased by 100000 (From 800000 to 700000).

C]

Western Corporation received an amount of $75000. It also recognized an asset gain in terms of machinery value. It's machine value got increased by $500000 (From 1000000 to 1500000), also the market value increased by $100000 (From 700000 to 800000).

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