Pedro Borrowed $250,000 to Purchase a Machine Costing $300,000

question 183

Multiple Choice

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?

• A) $0
• B) $45,000
• C) $163,000
• D) $208,000
• E) None of the above

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Definitions:

Adjusted Trial Balance Columns

This refers to the columns in a trial balance that have been adjusted for entries made in the general journal at the end of an accounting period before the preparation of financial statements.

Net Income

The total profit of a company after all expenses, taxes, and costs have been subtracted from total revenue; also known as the bottom line.

Income Statement Credit Column

The section of the income statement where credit entries, typically revenues and gains, are recorded.

Balance Sheet Credit Column

The section of the balance sheet where liabilities and equity accounts are listed, typically reflecting sources of the company’s funds.