1. Johnson Inc. and C&K Company entered into an exchange of real property. Here
ID: 2437532 • Letter: 1
Question
1. Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged.
Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.
A. $25,000 gain recognized; $593,000 basis in C&K property
B. $25,000 gain recognized; $793,000 basis in C&K property
C. $225,000 gain recognized; $593,000 basis in C&K property
D. None of the above
2. Which of the following statements about nontaxable exchanges is true?
A. The parties to the exchange agree that the properties exchanged are of equal value.
B. The parties to the exchange both realize gain on the exchange.
C. No cash can change hands in a nontaxable exchange.
D. Any gain realized on the exchange is not included in financial statement income.
Explanation / Answer
1. Answer is option C 225,000 gain recognized; $593,000 basis in C&K property
(Johnson treats the $25,000 cash and the $175,000 relief of debt as boot received.)
2. Answer is option A The parties to the exchange agree that the properties exchanged are of equal value.
(for non-taxable exchanges the agreement among parties related to the equal value of properties exchanged is necessary).
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