Eagle Works traded a plant asset with a cost of $25,000 and accumulated depreciation of $22,000 for a similar asset priced at $65,000.Assuming a trade-in of $3,500,the cost basis of the new asset under income tax rules is:

Question

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The cost basis of the new asset will be equal to the fair market value of the old asset surrendered ($65,000) reduced by the amount of cash received ($3,500), which equals $61,500. However, the accumulated depreciation on the old asset must also be subtracted from the cost basis of the new asset, resulting in a cost basis of $64,500 ($65,000 - $3,500 - $22,000).

Eagle Works Traded a Plant Asset with a Cost of $25,000