Question

Juan's business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of depreciation has been deducted during its period of use. The insurance company pays Juan $32,000 due to the accident. What is the minimum amount that Juan must spend on a new truck to avoid any gain recognition?

A) $40,000
B) $10,000
C) $32,000
D) $22,000

Answer 1

Juan must spend at least $32,000 on a new truck, which is the amount he received from the insurance settlement, to avoid gain recognition.

Step-by-step explanation:

A student has asked what is the minimum amount that Juan must spend on a new truck to avoid any gain recognition given that Juan's business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of depreciation has been deducted during its period of use, while the insurance company pays Juan $32,000 due to the accident.

To avoid gain recognition, Juan needs to spend at least the amount of the insurance settlement on a new truck. Since the insurance settlement is $32,000, Juan must spend at least this amount to avoid recognizing any gain. Therefore, the correct answer is C) $32,000.