Question

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 $140,000 and $15,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss

Answer 1

Pedro

Pedro's realized gain is $45,000.

Step-by-step explanation:

a) Data and Calculations:

Cost of equipment = $250,000

Adjusted basis of equipment after eight years = $0

Proceeds from sale of equipment = $45,000

Realized gain = Sales proceeds minus adjusted basis

= $45,000 - $0

= $45,000

b) Pedro's realized gain is the gain he earned by selling the equipment at a price higher than the original purchase price's adjusted basis. Since the equipment is sold at a higher than its adjusted basis, Pedro has achieved a realized gain of $45,000, which increases his current assets. The outstanding note balances of $140,000 and $15,000 remain liabilities to be settled in the future. They do not form part of the basis for calculating the realized gain or loss.