Sara constructs a small storage shed for resale to customers and incurs the following costs:
$3,000
Direct labor1,500
Direct materials700
Other direct costs300
Allocated indirect costs a.What is Sara's basis in this storage shed?b.Sara normally sells the storage sheds for $7,000 each. John, one of the workers who builds the storage sheds, buys one for $5,000. What is John's basis in his storage shed?
What will be an ideal response?
a.
| $3,000 | Direct labor |
| 1,500 | Direct materials |
| 700 | Other direct costs |
| 300 | Allocated indirect costs |
| $5,500 | Adjusted basis |
| b. | This is a bargain purchase, and John will have to report the $2,000 difference as income and add the difference to his purchase price of $5,000. John's basis becomes $7,000. |
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