Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the same business. He purchased the machine 3 years ago for $22,000 and has taken depreciation of $9,000 on the machine. In the exchange, Norman also receives $3,000 of cash. As a result of the exchange,
I.Norman's basis in the acquired machine is $6,000.
II.Norman recognizes a loss of $4,000 on the exchange.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the same business. He purchased the machine 3 years ago for $22,000 and has taken depreciation of $9,000 on the machine. In the exchange, Norman also receives $3,000 of cash. As a result of the exchange,
I.Norman's basis in the acquired machine is $6,000.
II.Norman recognizes a loss of $4,000 on the exchange.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Norman's basis in the acquired machine is $6,000 (the fair market value of the machine he received) and he recognizes a loss of $4,000 on the exchange (the difference between his basis in the old machine ($22,000 - $9,000 = $13,000) and the fair market value of the new machine ($6,000) plus the cash received ($3,000)).

Norman Exchanges a Machine He Uses in His Pool Construction