Question

Mr. N's business building is destroyed by a hurricane. The building had an adjusted basis to Mr. N of $200,000 and a fair market value immediately before the hurricane of $300,000. Mr. N receives a reimbursement of $270,000 from his insurance company and immediately spends $268,000 on a new business building. What amount must Mr. N include in his gross income?

(A) $70,000 gain.
(B) $(32,000) loss.
(C) $(30,000) loss.
(D) $2,000 gain.

Answer 1

(A) $70,000 gain.

Step-by-step explanation:

In his accounting it will do the following:

insurance 270,000 debit

bulding 200,000 credit

Profit on insurance claim 70,000 credit

The diference between book value and the proceeds from the insurance will be perceived as gains.

cash 270,000 debit

insurance 270,000 credit

bulding 268,000 debit

cash 268,000 credit