An Office Building with an Adjusted Basis of $320,000 Was

question 48

Multiple Choice

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30,2015.On January 11,2016,the insurance company paid the owner $450,000.The fair market value of the building was $500,000,but under the co-insurance clause,the insurance company is responsible for only 90 percent of the loss.The owner reinvested $410,000 in a new office building on February 12,2016,that was smaller than the original office building.What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?

• A)$0 and $320,000.
• B)$0 and $410,000.
• C)$40,000 and $320,000.
• D)$130,000 and 410,000.
• E)None of the above.

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Definitions:

Unadjusted Trial Balance

A preliminary list of all accounts and their balances before any adjusting entries are made, used to verify the equality of debits and credits.

Closing Entry

A closing entry is an accounting action that transfers the balances of temporary accounts to permanent accounts, thereby resetting the temporary accounts to zero for the start of the next accounting period.

Expense Accounts

Accounts that track the costs incurred by a business in its operational activities, which are then used to calculate net income by subtracting them from revenues.

Income Summary

An account used in the closing process that summarizes the revenues and expenses for a specific accounting period, facilitating the calculation of net income or loss.