Question

$13,500 basis, $3,200 gross income. The adjusted basis of property acquired in a bargain purchase is the asset's fair market value ($13,500). Income of $3,200 ($13,500 FMV - $10,300 cost) is recognized by Erica.

Erica is an executive at Gourmet Yogurt. Because she loves the yogurt so much, in the current year she decides to buy a yogurt machine from Gourmet for $10,300. The machine cost the company $10,000 (the wholesale price), and it has a fair market value of $13,500 (price at which sold at retail). Only executives are permitted to buy yogurt machines at a discount. What is Erica's adjusted basis for the yogurt machine, and how much must she include in her gross income?
a. $10,300 basis, $3,200 gross income.
b. $13,500 basis, $3,500 gross income.
c. $13,500 basis, $3,200 gross income.
d. $10,300 basis, $3,500 gross income.
e. None of these choices are correct.

Answer 1

Erica's adjusted basis for the yogurt machine is $10,300, and she must include $3,200 in her gross income, which is the difference between the fair market value and the purchase price.

Step-by-step explanation:

Erica is an executive at Gourmet Yogurt who bought a yogurt machine for a discounted price because of her executive status. The fair market value of the machine is $13,500, but she acquired it for $10,300, which is less than the market value. In such transactions, tax law requires the buyer to recognize income equivalent to the difference between the fair market value and the purchase price, because the discount is considered a form of compensation. Therefore, her adjusted basis for the yogurt machine is the amount she actually paid, $10,300, and the gross income that must be included is $3,200 (the difference between the fair market value of $13,500 and the purchase price of $10,300). The correct answer to the question is: a. $10,300 basis, $3,200 gross income.