Barnett Corporation owns an office building that cost $900,000. Barnett has taken $600,000 of depreciation on the building. The property is subject to a $600,000 mortgage. The office building has a current FMV of $400,000. Barnett Corporation is liquidated and the office building is distributed to a single individual shareholder who assumes the mortgage. Barnett Corporation must recognize
A)no gain or loss.
B)a $100,000 gain.
C)a $300,000 gain.
D)none of the above

Question

Quizplus · Accepted Answer

The shareholder is assuming the $600,000 mortgage, which means that Barnett Corporation is relieved of this obligation. However, the FMV of the building is only $400,000, which means that there is a $200,000 loss. Since the accumulated depreciation is $600,000, the recognized gain is $300,000 ($600,000 - $300,000 - $200,000). Therefore, the correct answer is C.

Barnett Corporation Owns an Office Building That Cost $900,000