Question

A machine that Ms. Cunningham used in her business was partially destroyed by a fire. The machine had an adjusted basis of $25,000 and a fair market value of $50,000 just before the fire. The fair market value was $20,000 after the fire and before any repairs were made. Ms. Cunningham's insurance company immediately reimbursed her $35,000. What is her gain or loss from the casualty?

Answer 1

her gain from the casualty is $10,000

Step-by-step explanation:

Data provided in the question:

Adjusted basis of machine just before the fire = $25,000

Fair market value = $50,000

The fair market value after the fire = $20,000

Amount reimbursed by the insurance company = $35,000

Now,

The book value of the machine at the time of fire will be the adjusted basis of machine just before the fire i.e $25,000

Since,

the amount reimbursed by the insurance company i.e $35,000 is greater than the book value of the machine just before the fire, therefore a gain will be recognized.

The amount of gain = amount reimbursed - Adjusted basis

= $35,000 - $25,000

= $10,000

Hence,

her gain from the casualty is $10,000