Chapter 9, Problem 20AP

On October 18 of last year, a flood washed away heavy construction equipment owned by Company K. The adjusted tax basis in the equipment was $416,000. On December 8 of last year, Company K received a $480,000 reimbursement from its insurance company. On April 8 this year, Company K purchased new construction equipment for $450,000.

1. a. How much of last year’s gain must Company K recognize because of the involuntary disposition of the equipment?
2. b. What is Company K’s tax basis in the new equipment?
3. c. How would your answers change if Company K paid $492,000 for the new equipment?