Circle Co. owns equipment 1 (FMV = $50,000, AB = $15,000) that it uses in its bu
ID: 2577288 • Letter: C
Question
Circle Co. owns equipment 1 (FMV = $50,000, AB = $15,000) that it uses in its business. Circle Co. exchanges equipment 1 for equipment 2 (FMV = $40,000) and stock worth $10,000 in a like - kind exchange.
17. What is Ci rcle Co.’s r ecognized gain or loss on the exchange? Note: you should calculate realized gain/loss first, but the question asks only for recognized gain/loss.
18. What is Circle Co.’s basis in equipment 2?
19. What is Circle Co.’s basis in the stock?
Note: the realized gain that was not recognized in Q17 did not disappear; it is built in to equipment 2 after the exchange (FMV of Equip 2 minus Circle Co.’s basis should equal any realized but not recognized gain from Q17.
Explanation / Answer
Realized gains refer to the amount of money you actually earned in the sale of an asset. When calculating your realized gain, you must deduct any costs associated with the sale. So in the present case realized gain is $35,000 which is calculated as follows.
Sales Price
50,000
Value of Equipment
15,000
15,000
Realized Gain
35,000
Recognized Gain =FMV of new equipment + FMV of the Stock-FMV of the Old equipment
= 40000+10000-50000=Zero
Basis of the New Machine Value of the old equipment exchanged in proportion 40000/50000*15000=12,000
Basis of the Stock Value of the old equipment exchanged in proportion 10000/50000*15000=3,000
Sales Price
50,000
Value of Equipment
15,000
15,000
Realized Gain
35,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.