73. During the current year, the Harlow Corporation, which specializes in commer
ID: 2774568 • Letter: 7
Question
73. During the current year, the Harlow Corporation, which specializes in commercial
construction, has the following property transactions:
a. In April, a tornado damages a crane and a dump truck at one of its construction
sites. The crane was acquired in 2010 for $120,000 and has an adjusted
basis of $39,650. The dump truck was acquired in 2008 for $70,000 and has
an adjusted basis of $33,880. The insurance company reimburses Harlow
$35,000 for the crane and $42,000 for the dump truck. The company decides
not to replace the dump truck and uses the insurance proceeds to purchase a
new crane for $110,000.
b. The company trades a road grader with a fair market value of $72,000 for a
bulldozer worth $60,000. Harlow receives $12,000 in the exchange. The road
grader originally cost $90,000 and has an adjusted basis of $50,000. The bulldozer
cost $85,000, and its adjusted basis is $37,000.
c. A fire destroys the company’s supply warehouse. The warehouse originally cost
$300,000 and has an adjusted basis of $200,000. Its fair market value before
the fire was $250,000. The insurance company pays Harlow $230,000, which
it uses to acquire a warehouse costing $280,000.
d. The city of PeaceDale condemns land that Harlow had acquired in 1979 for
$22,000 and held as an investment. The city pays Harlow the $195,000 fair
market value of the land. Harlow uses the proceeds to acquire a commercial
office park for $350,000.
e. Harlow sells an automobile used by its president for business purposes for
$10,000 to a local car dealership. The car originally cost $32,000, and its
adjusted basis is $15,000. The company had an agreement to replace the automobile
with a customized four-wheel-drive vehicle from a company that specializes
in custom cars. However, the day the company sells the automobile, it
is informed that the custom car company will not be able to deliver the vehicle
for at least 10 weeks. Harlow terminates its contract with the custom car company
and buys a new automobile from the local car dealership for $55,000.
Determine the realized and recognized gain or loss on each of Harlow’s property
transactions and the basis of any property acquired in each transaction.
Explanation / Answer
A. In April, a tornado damages a crane and a dump truck at one of its construction sites. The crane was acquired in 2010 for $120,000 and has an adjusted basis of $39,650. The dump truck was acquired in 2008 for $70,000 and has an adjusted basis of $33,880. The insurance company reimburses Harlow $35,000 for the crane and $42,000 for the dump truck. The company decides not to replace the dump truck and uses the insurance proceeds to purchase a new crane for $110,000
The purchase of the new crane is a qualified replacement. The reinvestment of the dump truck proceeds into a new crane does not qualify.
Dump Truck
Amount in $
Amount realized (Insurance proceeds)
$42,000.00
Adjusted basis
-$33,880.00
Realized Gain
$8,120.00
Recognized Gain
$8,120.00
Deferred Gain
$0.00
Harlow is recognizing a gain of $8,120 on the dump truck since no qualified replacement.
Crane
Amount in $
Amount realized (Insurance proceeds)
$35,000.00
Adjusted basis
$39,650.00
Realized Loss
-$4,650.00
Recognized Loss
$4,650.00
Deferred Loss
$0.00
Harlow is recognizing the $4,650 loss on the crane.
B. The company trades a road grader with a fair market value of $72,000 for a bulldozer worth $60,000. Harlow receives $12,000 in the exchange. The road grader originally cost $90,000 and has an adjusted basis of $50,000. The bulldozer cost $85,000, and its adjusted basis is $37,000.
Amount Realized ( Bulldozer + cash)
$72,000.00
Adjusted basis
-$50,000.00
Realized Gain
$22,000.00
Recognized Gain ( Cash boot received)
-$12,000.00
Deferred Gain
$10,000.00
Basis of bulldozer = $50,000 ($60,000 - $10,000)
Harlow recognized gain is $12,000 and its deferred gain is $10,000
C. A fire destroys the company’s supply warehouse. The warehouse originally cost $300,000 and has an adjusted basis of $200,000. Its fair market value before the fire was $250,000. The insurance company pays Harlow $230,000, which it uses to acquire a warehouse costing $280,000.
Harlow has realized gain of $30,000 from the fire ( $230,000 Insurance proceeds - $200,000 adjusted basis)
Harlow acquired a replacement warehouse that costs more than the insurance proceeds, so it can defer the $30,000 gain
The basis of the new warehouse is $250,000 ($280,000 - $30,000)
Amount Realized ( Insurance proceeds)
$2,30,000.00
Adjusted basis
-$2,00,000.00
Realized Gain
$30,000.00
Recognized Gain ( Cash boot received)
$0.00
Deferred Gain
$30,000.00
D. The city of PeaceDale condemns land that Harlow had acquired in 1979 for $22,000 and held as an investment. The city pays Harlow the $195,000 fair market value of the land. Harlow uses the proceeds to acquire a commercial office park for $350,000.
Harlow may elect to defer the gain it realizes on the condemnation.
Amount Realized ( Condemnation proceeds)
$1,95,000.00
Adjusted basis
-$22,000.00
Realized Gain
$1,73,000.00
Recognized Gain ( Cash boot received)
$0.00
Deferred Gain
$1,73,000.00
Harlow has realized a gain of $173,000 on the condemnation
Harlow does not have to recognize any gain because the entire $195,000 of condemnation proceeds are reinvested in the purchase of the office work.
Basis of office park = $177,000 ($350,000 - $173,000)
E. Harlow sells an automobile used by its president for business purposes for $10,000 to a local car dealership. The car originally cost $32,000, and its adjusted basis is $15,000. The company had an agreement to replace the automobile with a customized four-wheel-drive vehicle from a company that specializes in custom cars. However, the day the company sells the automobile; it is informed that the custom car company will not be able to deliver the vehicle for at least 10 weeks. Harlow terminates its contract with the custom car company and buys a new automobile from the local car dealership for $55,000.
This transaction is structured as a sane and purchase. The IRIS will collapse sales and purchases involving the same parties into one like kind exchange.
Amount Realized
$10,000.00
Adjusted basis
-$15,000.00
Realized Loss
$5,000.00
Recognized Loss
$0.00
Deferred Loss
$5,000.00
As an exchange, Harlow will not be able to immediately recognize a loss on the old automobile.
The $5,000 loss is deferred until Harlow sells the new automobile
Fair market value of new automobile
$55,000.00
Add : Deferred Loss
$5,000.00
Basis in new automobile
$60,000.00
Dump Truck
Amount in $
Amount realized (Insurance proceeds)
$42,000.00
Adjusted basis
-$33,880.00
Realized Gain
$8,120.00
Recognized Gain
$8,120.00
Deferred Gain
$0.00
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