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1 February, 21:04

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?

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  1. 1 February, 22:04
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    her gain from the casualty is $10,000

    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
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