In Class Solution Bmgt 417

Chapter 9
Property Acquisition and Cost Recovery

McGraw-Hill Connect Homework Answers

40. [LO 1] Emily purchased a building to store inventory for her business. The purchase price was $760,000. Beyond this, Emily incurred the following necessary expenses to get the building ready for use: $10,000 to repair the roof, $5,000 to make the interior suitable for her finished goods, and $300 in legal fees. What is Emily’s cost basis in the new building?

$765,300 cost basis, computed as follows:
| |Amount |Explanation |
| | | |
|Description | | |
|Purchase price |$760,000 | |
|Improvements |5,000 |Business preparation costs |
|Legal fees | 300 |Business preparation costs |
|Cost basis in building |$765,300* | |

*Note that the $10,000 repair for the roof was not capitalized. The repair is likely a routine maintenance expenditure rather than a capitalized cost. However, if the expense improved or prolonged the life of the asset beyond what would be considered maintenance to keep it in its working condition, it would be capitalized.

45. [LO 1] Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $125,000. The appraised fair market value of the warehouse was $75,000, and the appraised value of the land was $100,000.

a. What is Bob’s basis in the warehouse and in the land? b. What would be Bob’s basis in the warehouse and in the land if