A factory building owned by Amber, Inc. is destroyed by a hurricane. The adjusted basis of the building was $400,000 and the appraised value was $425,000. Amber receives insurance proceeds of $390,000. A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000. What is the recognized gain or loss and what is the basis of the new factory building?
A) $0 and $450,000.
B) $0 and $460,000.
C) ($10,000) and $440,000.
D) ($10,000) and $450,000.
E) None of the above.

Question

Quizplus · Accepted Answer

The first step is to calculate the adjusted basis before the hurricane:
Adjusted basis = $400,000

Next, we calculate the realized loss:
Realized loss = adjusted basis - insurance proceeds
Realized loss = $400,000 - $390,000
Realized loss = $10,000

Since a new factory building was constructed, we need to calculate the basis of the new building:
Basis of new building = cost of construction
Basis of new building = $450,000

Lastly, we need to determine the recognized gain or loss:
Recognized gain or loss = realized loss - any gain recognized on the replacement property
In this case, there is no gain recognized on the replacement property since the cost of construction exceeds the insurance proceeds.

Therefore, the recognized gain or loss is ($10,000) and the basis of the new factory building is $450,000, making choice D the correct answer.

A Factory Building Owned by Amber, Inc