Question

In year 0, Javens Inc. sold machinery with a fair market value of $640,000 to Chris. The machinery's original basis was $499,520 and he machinery was $74,000, so its adjusted basis to Javens was $425,520. Chris paid Javens $64.000 immediately in year C) and provided a note to Javens indicating that Chris would pay Javens $96,000 a year for six years beginning in year 1 a. What is the amount and character of the gain that Javens will recognize in year 0? b. What amount and character of the gain will Javens recognize in years 1 through 6? Complete this question by entering your answers in the tabs below. Required A Required B What is the amount and character of the gain that Javens will recognize in year 0? (Do not round intermediate computations.) Amount Description Recognized Gain Character of Recognized nin: Ordinary Gain 51231 gain Required )

Answer 1

1) Amount and Character of gain:

Original Cost of Machinery = 499520

(-) Accumulated Depreciation = 74000

Adjusted value of asset = 425520

Agreed selling price = 640000

Gains = 214480

Amount of gains recognised in Year 0 = $ 214480

This gain would be recognised as capital profit.

2) There is no need to recognize any gains in the year 1 through 6, only regular entry for recovery of receivable amount is required to be passed.