In year 0, Longworth Partnership purchased a machine for $41,250 to use in its b
ID: 2574138 • Letter: I
Question
In year 0, Longworth Partnership purchased a machine for $41,250 to use in its business. In year 3, Longworth sold the machine for $38,100. Between the date of the purchase and the date of the sale, Longworth depreciated the machine by $29,400. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)
a. What is the amount and character of the gain (loss) Longworth will recognize on the sale?
b. What is the amount and character of the gain (loss) Longworth will recognize on the sale if the sale proceeds were increased to $47,500?
c. What is the amount and character of the gain (loss) Longworth will recognize on the sale if the sale proceeds were decreased to $9,300?
Description Amount Total Gain/(Loss) Recognized Character of Recognized Gain/(Loss): Ordinary Gain/(Loss) §1231 gain/(loss)Explanation / Answer
Solution:
a) Calculation of the Amount and Character of the Gain (Loss) Longworth will Recognize on the Sale:
b) Calculation of the Amount and character of the gain (loss) Longworth will recognize on the sale if the sale proceeds were increased to $47,500:
Only the gain caused by depreciation is treated as ordinary income under §1245, theremaining gain is §1231.
c) Calculation of the Amount and character of the gain (loss) Longworth will recognize on the sale if the sale proceeds were decreased to $9,300:
Only gains are treated as ordinary income under §1245, any loss is §1231.
Description Amount Explanation (1) Amount Realized $38,100 Given (2) Original Basis $41,250 Given (3) Accumulated Depreciation $29,400 Given (4) Adjusted Basis $11,850 (2) - (3) (5) Gain/(Loss) Recognized $26,250 (1) - (4) (6) Ordinary income (§1245 depreciation recapture) $26,250 Lesser of (3) or (5) §1231 gain $0 (5) - (6)