Otto Operates a Bakery and Is on the Cash Method

question 18

Essay

Otto operates a bakery and is on the cash method and calendar year. This year, one of Otto's ovens caught fire and was partially destroyed. Otto bought it a few years ago for $29,500 and claimed depreciation of $13,900 up to the fire. Otto was charged $3,450 for repairs to the oven but the insurance company paid Otto $1,975 for the damage. What is Otto's casualty loss deduction?

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Definitions:

Straight-Line Method

A method of calculating depreciation or amortization by evenly spreading the cost of an asset over its useful life.

Scrap Value

The estimated resale value of an asset at the end of its useful life, also known as salvage value.

Units-Of-Production Method

An approach to depreciation that allocates the cost of an asset over its useful life based on its output or usage, rather than the passage of time.

Scrap Value

The estimated resale value of an asset after its useful life is over and it can no longer be used as intended.