Question

Rebecca trades in her four-wheel drive truck for a new one. Rebecca's truck cost $20,000 and has an $8,000 basis on the date of the trade-in. The price of the new truck is $27,000 and the dealer gives Rebecca a $10,000 trade in allowance on her old truck. She uses the trucks in her business. What is Rebecca's basis in the new truck?

	a.	$8,000
	b.	$18,000
	c.	$25,000
	d.	$27,000
	e.	$29,000

According to the test bank 2016, the answer is C, $25000. Please explain how to get this number. Thank you

Answer 1

Statement Showing Rebecca's basis in the new truck :

Particulars	Amount ($)
Basis of Old Truck on the date of trade in	$8,000
Add : Price of New Truck	$27,000
Less : Trade in Allowance for old truck	($10,000)
Therefore, Basis of New truck	$25,000

The depreciable basis of the new truck is $25,000 (adjusted basis of old truck: $8,000 plus $17,000 cash Rebecca paid).

Cash Paid by Rebecca for New truck = Cost of New Truck (-) trade-in allowance of Old Truck

= $27,000 (-) $ 10000

= $17,000

The tax basis (value for tax purposes) of the trade-in would be subtracted from the basis of the new vehicle.

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