Sanjay exchanges a warehouse he uses in his rental business for a building owned by Sidney which he will use in his rental business. The adjusted basis of Sanjay's building is $320,000 and the fair market value is $500,000. The adjusted basis of Sidney's warehouse is $160,000 and the fair market value is $500,000. Which of the following statements is correct?

A) Sanjay's recognized gain is $0 and his basis for the warehouse received is $500,000.

B) Sanjay's recognized gain is $180,000 and his basis for the warehouse received is $500,000.

C) Sanjay's recognized gain is $0 and his basis for the warehouse received is $320,000.

D) Sanj ay's recognized gain is $180,000 and his basis for the warehouse received is

Question

Business

Kira Levy

14 July, 04:54

Sanjay exchanges a warehouse he uses in his rental business for a building owned by Sidney which he will use in his rental business. The adjusted basis of Sanjay's building is $320,000 and the fair market value is $500,000. The adjusted basis of Sidney's warehouse is $160,000 and the fair market value is $500,000. Which of the following statements is correct?

A) Sanjay's recognized gain is $0 and his basis for the warehouse received is $500,000.

B) Sanjay's recognized gain is $180,000 and his basis for the warehouse received is $500,000.

C) Sanjay's recognized gain is $0 and his basis for the warehouse received is $320,000.

D) Sanj ay's recognized gain is $180,000 and his basis for the warehouse received is

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Answers (1)

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Cory Willis · Answer 1

A) Sanjay's recognized gain is $0 and his basis for the warehouse received is $500,000.

Explanation:

According to the Fair Value Accounting, certain assets are required to be recorded at fair value (i. e the market value) because the market-driven values are more relevant and reliable and represent the current value of an asset. Therefore Sanjay will record the warehouse received at fair value (i. e $500000).

Because the fair value of the asset is greater than it's adjusted value, there is a gain on the asset but since Sanjay has not offered the warehouse for sale to any body yet, the difference between the adjusted basis (book value) and the fair value (i. e the gain) is not realized yet. Therefore no gain is recognized yet. The gain will be recognized when the warehouse is disposed off/sold.