Question

Deduction Concepts (LO. 5) A truck owned by Duster Demolition Services is involved in an accident. The truck originally cost $41,800, and $25,850 of depreciation had been taken on the truck as of the date of the accident. The cost of repairing the truck is $9,600, for which the insurance company reimburses Duster $7,500. a. Duster is entitled to deduct a loss of $ as a result of the accident, b. The adjusted basis of the truck after the accident is $

Answer 1

a. Duster is entitled to deduct a loss of $ 2,100 as a result of the accident

(Cost of Repairing the Truck = $ 9,600

Less : Insurance Claim = $ 7,500

Loss = (9,600 - 7,500) = $ 2,100

b. The adjusted basis of the truck after the accident is $ 15,950

There is no change in the value of the Truck original cost or accumulated depreciation because the truck is repaired and is still in use and its value is the same as before the accident.

Original Cost of Truck = $ 41,800

Accumulated Depreciation = $ 25,850

Net value of Truck = $ 15,950 ($41,800 - $25,850)

a. Davidson is a cash basis taxpayer

Davidson will deduct the expenses when Expense is paid. Therefore, Davidson's current year deduction is the warranty expense paid for defects under warranty

b. Davidson is a accrual basis taxpayer

Davidson can deduct the expenses when the likelihood of the future event is probable, and the amount of the expense can be reasonably estimated. Davidson's current year deduction is the estimated cost for defects under warranty.