Otto Operates a Bakery and Is on the Cash Method

question 42

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 $20,000 and claimed depreciation of $12,000 up to the fire. Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage. What is Otto's casualty loss deduction?

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Definitions:

Nominal Variables

Variables that are measured in terms of money and have not been adjusted for inflation, as opposed to real variables which are inflation-adjusted.

Money Supply

The total amount of money in circulation or in existence within a country's economy.

Exchange Rate

The price of one country's currency expressed in the currency of another country; it determines how much foreign currency one can get with a unit of domestic currency.

Price Level

The general cost of goods and services in an economy at a given time.