In the current year, Sparrow sold machinery with a fair market value of $200,000
ID: 2601174 • Letter: I
Question
In the current year, Sparrow sold machinery with a fair market value of $200,000. The machinery's original basis was $190,000 and Sparrow's accumulated depreciation on the machinery was $40,000. Sparrow received $50,000 in the current year and a note paying Sparrow $75,000 a year for two years beginning in next year. What is the amount and character of the gain that Sparrow will recognize in each year that he receives payments?
Realized Gain/Loss Recognized Gain/Loss year 1 Character of Gain/Loss year 1 Recognized Gain/Loss year 2 Character of Gain/Loss year 2 Realized Gain/Loss year 3 Character of Gain/Loss year 3
Explanation / Answer
Gain = Value realised on sale - Adjusted basis
= [50000+75000+75000]- 150,000
= 200,000-150,000 = $ 50,000
Gain to be recognised in current year : gain x received in current year /total consideration received
= 50,000 x 50,000/200,000
= $ 12,500
**Total consideration = 50000+75000+75000=200000
The character of gain is a ordinary gain if used in trade or business (it seems since depreciation is charged ,machinery was used for business purpose)