In year 0, Longworth Partnership purchased a machine for $57,250 to use in its b

Question

In year 0, Longworth Partnership purchased a machine for $57,250 to use in its business. In year 3, Longworth sold the machine for $44,300. Between the date of the purchase and the date of the sale, Longworth depreciated the machine by $24,900. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

b. What is the amount and character of the gain (loss) Longworth will recognize on the sale if the sale proceeds were increased to $69,000?

     

Total Gain/(Loss) Recognized $0selected answer incorrect Character of Recognized Gain/(Loss): Ordinary Gain/(Loss) $24,900selected answer correct §1231 gain/(loss) $5,000selected answer incorrect

Explanation / Answer

Answer

Only the gain caused by depreciation is treated as ordinary income under §1245, the remaining gain is §1231.

Hence $36,650 gain ($24,900 ordinary and $11,750 §1231) computed as above.

Particulars Calculation Amount (1) Amount Realized $69000 (2) Original Basis $57250 (3) Accumulated Depreciation $24900 (4) Adjusted Basis (2-3) $32350 (5) Gain/(Loss) Recognized (1-4) $36650 (6) Ordinary income (§1245 depreciation recapture) Lesser of 3 or 5 $24900 §1231 gain (5-6) $11750

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