Question

Tesco Inc. and MW Company exchanged like-kind production assets. Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the following statements is false?
A. Tesco’s realized gain is $26,100 and recognized gain is 0.
B. MW's realized gain is $59,400 and recognized gain is $7,500.
C. Tesco’s basis in its newly acquired asset is $61,400.
D. MW's basis in its newly acquired asset is $35,600.

Answer 1

The answer is; D. MW's basis in its newly acquired asset is $35,600.

Step 1: Determine Tesco Inc's Cost basis, realized gain, and recognized gain

Tesco Inc's newly acquired asset = $53,900 + $7,500 = $61,400

Realized gain = Fair market value - cost basis    .....(i)

where;

Fair market value = $80,000

cost basis = $53,900

Substituting the values in (i)

Realized gain = $80,000 - $53,900 = $26,100

Tesco had a recognized gain of $0

Recognized gain = $0

Step 2: Determine MW Company's Cost basis, realized gain and recognized gain

MW Company's newly acquired asset = $28,100

Realized gain = Fair market value - cost basis   ...(ii)

where;

Fair market value = $87,500

cash received = $7,500

cost basis = $28,100

Substituting the values in (ii)

Realized gain = $87,500 - $28,100 = $59,400

MW had a recognized gain of $7,500

Recognized gain = $7,500 in cash

Thus, the false statement is D. MW's basis in its newly acquired asset is $35,600.

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