29 Jun Question Harry had the following property exchanges in 2012:
Question
Harry had the following property exchanges in 2012:
• Harry exchanged a machine used in his business, with an adjusted basis of $37,484 and a fair market value of $59,000, for a machine owned by Jack. Jack’s machine had an adjusted basis of $49,500 and a fair market value of $55,000. As part of the exchange, Jack also gave Harry $4,000 in cash.
• Harry exchanged a machine used in his business, with an adjusted basis of $9,371 and a fair market value of $14,750, for office furniture owned by Jill. Jill’s furniture had an adjusted basis of $11,250 and a fair market value of $13,750. As part of the exchange, Jill also gave Harry $1,000 in cash.
• Harry exchanged a refrigeration system used in his business, with an adjusted basis of $112,000 and a fair market value of $110,000, for a small warehouse owned by Peter. Peter’s warehouse had a $60,000 liability that Harry agreed to assume. Peter’s warehouse had an adjusted basis of $185,600 and a fair market value of $170,000.
• Harry exchanged a tract of land that he was holding for investment for a tract of land owned by Mina Co. Harry had acquired the land 13 years ago for $6,000. Its fair value is $13,000. The land owned by Mina Co. was acquired 9 months ago for $17,000 and had a fair market value of $20,000 at the date of exchange. Harry agreed to assume the $7,000 debt on Mina’s land.
Required:
For each of the above situations, respond to the following:
a) Calculate the realized gain for Harry and the other party in the exchange.
b) Calculate the recognized gain for Harry and the other party in the exchange.
c) What is each party’s basis in the property received?
Question 2 (20 marks)
Erica, a scientist, had worked for PBJ Labs, Ltd. for 15 years. On June 30, 2012, she lost her job due to corporate downsizing. Her husband, Morris, an assembly line worker, lost his job on July 31, 2012 when his employer closed down due to bankruptcy. From January 1 to July 31, 2012, Morris earned $25,000. He felt fortunate that he received all his pay when his employer closed down. For 2012, Erica received $50,000 in salary and benefits from PBJ. In addition, PBJ gave Erica a severance package of $5,000 and agreed to continue paying her medical insurance premiums of $500 per month until June 30, 2013. Her medical plan provided coverage for her and her family.
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