Pedro borrowed $125,000 to purchase a machine costing $150,000.He later borrowed an additional $25,000 using the machine as collateral.Both notes are nonrecourse.Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $115,000 and $21,000.Pedro sells the machine subject to the two liabilities for $27,000.What is his realized gain or loss?
A)$0.
B)$27,000.
C)$136,000.
D)$163,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Pedro's realized gain is calculated as the amount realized from the sale minus the adjusted basis. The amount realized includes the cash received ($27,000) plus the liabilities assumed by the buyer ($115,000 + $21,000 = $136,000), totaling $163,000. Since the adjusted basis is zero, the realized gain is $163,000.

Pedro Borrowed $125,000 to Purchase a Machine Costing $150,000