# In Class Solution Bmgt 417

Topics: Depreciation Pages: 9 (2229 words) Published: October 8, 2012
Chapter 10
Property Dispositions

34. [LO 1] Lassen Corporation sold a machine to a machine dealer for \$25,000. Lassen bought the machine for \$55,000 and has claimed \$15,000 of depreciation expense on the machine. What gain or loss does Lassen realize on the transaction?

(\$15,000) loss, computed as follows:
Description| Amount| Explanation|
(1) Amount Realized| \$25,000 | Given|
(2) Adjusted Basis| 40,000| \$55,000 original basis - \$15,000 accumulated depreciation| Gain (Loss) Realized| (\$15,000)| (1) – (2)|

37. [LO 3, 4] In year 0, Longworth Partnership purchased a machine for \$40,000 to use in its business. In year 3, Longworth sold the machine for \$35,000. Between the date of the purchase and the date of the sale, Longworth depreciated the machine by \$22,000.

a. What is the amount and character of the gain Longworth will recognize on the sale? b. What is the amount and character of the gain Longworth will recognize on the sale if the sale proceeds were increased to \$45,000? c. What is the amount and character of the gain Longworth will recognize on the sale if the sale proceeds were decreased to \$15,000?

a. \$17,000 ordinary income.

Description| Amount| Explanation|
(1) Amount Realized| \$35,000| Given|
(2) Original Basis| 40,000 | Given|
(3) Accumulated Depreciation| 22,000| Given|
(4) Adjusted Basis| 18,000 | (2) - (3) |
(5) Gain/(Loss) Recognized| \$17,000 | (1) – (4)|
(6) Ordinary income (§1245 depreciation recapture)| \$17,000| Lesser of (3) or (5)| §1231 gain | \$0| (5) – (6) |
Because the entire gain is caused by depreciation deductions, the entire gain is treated as ordinary income under §1245.|

b.
\$27,000 gain (\$22,000 ordinary and \$5,000 §1231) computed as follows:

Description| Amount| Explanation|
(1) Amount Realized| \$45,000| Given|
(2) Original Basis| 40,000 | Given|
(3) Accumulated Depreciation| 22,000| Given|
(4) Adjusted Basis| 18,000 | (2) - (3) |
(5) Gain/(Loss) Recognized| \$27,000 | (1) – (4)|
(6) Ordinary income (§1245 depreciation recapture)| \$22,000| Lesser of (3) or (5)| §1231 gain | \$5,000| (5) – (6) |
Only the gain caused by depreciation is treated as ordinary income under §1245, the remaining gain is §1231.|

c. (\$3,000) ordinary loss, computed as follows:

Description| Amount| Explanation|
(1) Amount Realized| \$15,000| Given|
(2) Original Basis| 40,000 | Given|
(3) Accumulated Depreciation| 22,000| Given|
(4) Adjusted Basis| 18,000 | (2) - (3) |
(5) Gain/(Loss) Recognized| (\$3,000) | (1) – (4)|
(6) Ordinary income (§1245 depreciation recapture)| \$0| Lesser of (3) or (5)| §1231 loss| (\$3,000)| (5) – (6) |
Only gains are treated as ordinary income under §1245, any loss is §1231.|

38. [LO 3, 4] On August 1 of year 0, Dirksen purchased a machine for \$20,000 to use in its business. On December 4 of year 0, Dirksen sold the machine for \$18,000.

d. What is the amount and character of the gain or loss Dirksen will recognize on the sale? e. What is the amount and character of the gain or loss Dirksen will recognize on the sale if the machine was sold on January 15 of year 1 instead?

a. (\$2,000) ordinary loss.

Description| Amount| Explanation|
(1) Amount Realized| \$18,000| Given|
(2) Original Basis| 20,000 | Given|
(3) Accumulated Depreciation| \$0| *|
(4) Adjusted Basis| 20,000 | (2) - (3) |
(5) Gain/(Loss) Recognized| (\$2,000) | (1) – (4)|
(6) Ordinary income (§1245 depreciation recapture)| \$0| Lesser of (3) or (5)| Ordinary loss| (\$2,000)| (5) – (6) |
No depreciation is allowed on an asset placed in service and disposed of during the same taxable year. Assets held less than one year are ordinary rather than section 1231 assets|

b. \$3,307 ordinary income.

Description| Amount...