In June, a fire completely destroyed office furniture owned by W&S Inc. W&S's adjusted tax basis in the furniture was $17,040. W&S received a $15,000 reimbursement from its property insurance company, and on August 8, it paid $16,000 to replace the furniture. Compute W&S's recognized gain or loss on the involuntary conversion and its tax basis in the new furniture.

Question

Quizplus · Accepted Answer

To determine the recognized gain or loss, we need to compare the amount of reimbursement received ($15,000) to the adjusted tax basis of the furniture ($17,040). Since the reimbursement is less than the adjusted tax basis, there is a recognized loss.

The recognized loss is calculated as follows:

Reimbursement received: $15,000 
Adjusted tax basis of furniture: $17,040 
Loss: $17,040 - $15,000 = $2,040

The tax basis in the new furniture is calculated as follows:

Cost to replace the furniture: $16,000 
Plus: recognized loss: $2,040 
Tax basis in new furniture: $18,040

Therefore, the correct answer is B.

In June, a Fire Completely Destroyed Office Furniture Owned by W&S