Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the same business.He purchased the machine 3 years ago for $22,000 and has taken depreciation of $9,000 on the machine.In the exchange,Norman also receives $3,000 of cash.As a result of the exchange,
I.Norman's basis in the acquired machine is $10,000.
II.Norman recognizes a loss of $3,000 on the exchange.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the same business.He purchased the machine 3 years ago for $22,000 and has taken depreciation of $9,000 on the machine.In the exchange,Norman also receives $3,000 of cash.As a result of the exchange,
I.Norman's basis in the acquired machine is $10,000.
II.Norman recognizes a loss of $3,000 on the exchange.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

To determine Norman's basis in the acquired machine, we need to calculate the adjusted basis of the machine he exchanged. The adjusted basis is calculated by subtracting the total depreciation taken from the initial cost. Therefore:

Adjusted basis = $22,000 - $9,000 = $13,000.

Since Norman exchanged the machine for a used machine worth $6,000 and received $3,000 of cash, the total value of the exchange is $9,000.

Thus, Norman's basis in the acquired machine is the total value of the exchange minus the cash received, which is $9,000 - $3,000 = $6,000.

Therefore, statement I is correct, and statement II is incorrect because there is no loss recognized in this exchange.

Norman Exchanges a Machine He Uses in His Pool Construction