Melba purchases land from Adrian. Melba gives Adrian $225,000 in cash and agrees to pay Adrian an additional $400,000 one year later plus interest at 5%.

a. What is Melba?s adjusted basis for the land at the acquisition date?
b. What is Melba?s adjusted basis for the land one year later?

Explanation:

The adjusted basis for a property/land is the net cost of the property after adjusting for factors that might attract tax as related to the land

The adjusted basis for the land at the acquisition date is the net cost of the land at the acquisition date which will be ( $225000 + $400000 ) because that was the net cost of the Land at the date of acquisition before an agreement was later reached by Melba requiring him to pay $400000 plus an interest of 5%

Hence the adjusted basis for the land one year later will be

=  ( $225000 + $400000 ) + 5% of $400000

= ( $625000 ) + $20000

= $645000

answer; is usually (less than) the socially optimal level of consumption;