In year 0, Canon purchased a machine to use in its business for $56,000. In year
ID: 2760006 • Letter: I
Question
In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated the machine by $32,000. (Loss amounts should be indicated by a minus sign.)
What is the amount and character of the gain or loss Canon will recognize on the sale, assuming that it is a corporation and the sale proceeds were increased to $60,000?
Total Gain (Loss) recognized: $36,000
Character of Recognized Gain (Loss)-
Ordinary Gain (Loss): ??????
§123 Gain (Loss): ??????
In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated the machine by $32,000. (Loss amounts should be indicated by a minus sign.)
Explanation / Answer
Solution : $36,000 gain ($32,000 ordinary and $4,000 §123) computed as follows Description Amount/explanation [1] amount realised $60000 given [2] Original Basis $56000 given [3] AccumulatedDepreciation $32000 given [4] Adjusted Basis 24000 [2+3] [5] Gain/(Loss)Recognized 36000 [1-4] [6] Ordinaryincome 32000 lowe of (3) or (5) [7] §123 gain 4000 [5-6] Only the gain caused by depreciation is treated as ordinary income under §1245, the remaining gain is §123