Chuck, a resident of Phoenix, owns a 20-foot sailboat he purchased new five years ago for $18,000. Chuck keeps the boat in a small berth in San Diego for which he pays $60 per month in rent. In the past, Chuck would become a “Zonie,” heading to San Diego several times during the summer months to go sailing. However, for the past year, commitments in Phoenix prevented Chuck from making his usual trips to San Diego. In fact, Chuck has decided to sell his sailboat, as it has become unlikely he will be able to spend much time in San Diego over the next few years. Chuck placed an ad on an Internet site offering the boat for sale for $12,000, its current “blue book” value. A buyer from Oregon agreed to meet Chuck at the berth in San Diego to inspect the boat and conclude the purchase. Much to Chuck’s dismay, when the boat was removed from the water, in became apparent the keel had significant rot and would require substantial and costly repair before the boat was restored to saleable condition. Disgusted, Chuck simply told his buyer “She’s yours now – take it” and handed-over his title to the sailboat.
Query 1: Should Chuck recognize a loss for transferring his title to the boat for free? Does the buyer recognize income upon receiving the boat?
Query 2: If either is to recognize loss or income respectively, when are they to recognize it?
There are template and example on the attached file.
