Final answer:
The recognized gain in an exchange that lacks commercial substance with cash received is calculated by the formula
of cash received divided by the total of cash received plus fair value of the asset given up.
Step-by-step explanation:
The gain recognized in an exchange that lacks commercial substance and in which cash is received is computed by multiplying the total gain by the formula: cash received divided by the total of cash received plus the fair value of the asset given up.
This means that when part of the transaction includes cash, often referred to as 'boot', the realized gain must be partially recognized for tax purposes. Specifically, the formula used to calculate the recognized gain is B. cash received divided by the total of cash received plus fair value of the asset given up.
For example, if a financial investor buys a share of stock for $45 and then later sells it for $60, the $15 difference represents a capital gain.
However, in a non-monetary exchange that lacks commercial substance, where cash is also involved, the recognized gain might not be the full capital gain depending on the proportion of cash involved in the total consideration exchanged.
The gain recognized in an exchange that lacks commercial substance and in which cash is received is computed by multiplying the total gain by the formula of: cash received divided by the total of cash received plus fair value of the asset given up.