Red Company Had an Involuntary Conversion on December 23, 2012

question 126

Multiple Choice

Red Company had an involuntary conversion on December 23, 2012.The machinery had been acquired on April 1, 2010, for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it.This was Red's only casualty or theft event for the year.As a result of this event, Red initially has:

• A)$10,000 § 1231 loss.
• B)$10,000 § 1245 recapture gain.
• C)$4,200 casualty loss.
• D)$4,200 § 1231 loss.
• E)None of the above.

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Definitions:

Motor Vehicle Licence

A document granting the legal permission to drive a motor vehicle on public roads.

Operating Lease

A leasing agreement allowing a lessee to use an asset, but the lease does not transfer ownership of the asset to the lessee.

Risk Of Obsolescence

The risk that a product or service will become outdated or no longer useful due to advancements in technology or changes in market preferences.

Income Tax

A tax imposed by the government on the income generated by individuals or entities, which varies according to the amount of income.