Question

Desmond Photocopying and Supplies, Inc. exchanges an old photocopying machine (with an adjusted basis of $0 and an FMV of $5,000) plus $3,000 in cash for a new photocopying machine. Desmond's book value in the machine is $4,000. The FMV of the new machine is $8,000. How does this exchnage affect the company's taxable income and its net income for financial accounting purposes for the tax year of the exchange? What is its adjusted basis in the new photocopying machine?

Answer 1

Cost of old machine = $4000

Cash paid for new machine = $3000

FMV of new machine = $8000

Taxable income = $ 8000- 4000- 3000 = $1000

Net income for financial accounting purpose for tax year is also same i.e. $1000.

Calculating adjusted basis in an asset begins with its original purchase price. You can increase your basis from there by adding on the amount of money you've spent improving the asset, as well as by amounts you might have paid for legal fees or selling costs.

Your basis decreases if you must subtract amounts that you previously claimed as tax deductions, such as depreciation, casualty losses, or theft losses.

Currenctly the adjusted basis for new photocopy machine is $3000. Because $3000 has been spent to acquire this machine. If any tax payable on capital gain then that also will be added.