Question

Required information The following information applies to the questions displayed below) On August 1 of year o, Dirksen purchased a machine for $33,250 to use in its business. On December 4 of year 0, Dirksen sold the machine for $26,000. Use MACRS Table (Loss amounts should be indicated by a minus sign. Do not round percentages used for calculations. Round other intermediate computations to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.) a. What is the amount and character of the gain or loss Dirksen will recognize on the sale? Amount Description Total Gain/(Loss) Recognized Character of Recognized Gair(Loss) Ordinary Gain/(Loss) 51231 gain floss)

Answer 1

Answer:

a.)
Determine the adjusted basis.
Original basis = $33,250
Accumulated Depreciation = $0
Adjusted basis = Original basis - Accumulated depreciation
=$33,250 - $0
=$33,250

Determine gain (loss) recognized.
Amount realized = $26,000
Adjusted basis = $33,250
Gain (loss) = Amount realized - Adjusted basis
=$26,000 - $33,250
=($7,250)

Determine the ordinary income ($1245 depreciation recapture)
Accumulated depreciation = $0
Gain (loss) recognized = $(7,250)
The ordinary income ($1245 depreciation recapture) will be lesser of the accumulated depreciation and the gain (loss) recognized. Therefore the ordinary income is $0.

Determine the ordinary loss from sale of asset
Gain (loss) recognized = $(7,250)
Ordinary Income = $0
Ordinary Loss = Gain (loss) recognized - Ordinary Income
= $(7,250)-$0
=$(7,250)

Hence When Dirksen sells the asset on December 1 the ordinary losss recognized on the sale of asset is $(7,250)

b.)
Determine the depreciation for the year 1
Original basis = $33,250
Depreciation rate = 14.29% (Refer 9th chapter - appendix table 1)
Accumulated depreciation = Original basis x Depreciation rate
= $33,250 x 14.29%
= $4,751

Determine the depreciation for the year 2
Original basis = $33,250
Depreciation = 24.9% (Refer 9th chapter - appendix table 1)
Depreciation rate for half year = Depreciation rate x 0.5
=24.9% x 0.5
=12.245%

Accumulated depreciation = Original basis x Depreciation rate
=$33,250 x 12.245%
=$4,072

Determine the accumulated depreciation
Depreciation for Year 1 =$4,751
Depreciation for Year 2 = $4,072
Accumulated depreciation = Depreciation for year 1 + Depreciation for Year 2
=$4,751 + $4,072
=$8,823

Determine the adjusted basis of machinery
Original basis = $33,250
Accumulated depreciation = $8,823 (from step 1)
Adjusted basis = Original basis - Accumulated depreciation
=$33,250 - $8,823
=$24,427

Determine gain (loss) recognized
Amount realized = $26,000
Adjusted basis = $24,427
Gain (loss) = Amount realized - Adjusted basis
=$26,000 - $24,427
=$1,573

Determine the ordinary income ($1245 depreciation recapture)
Accumulated depreciation = $8,823
Gain (loss) recognized = $1,573
The ordinary income ($1245 depreciation recapture ) will be lesser of the accumulated depreciation and gain (loss) recognized. Therefore, the ordinary income is $1,573

Determine the 1231 gain
Gain (loss) recognized = $1,573
Ordinary income = $1,573
1231 gain = Gain (loss) recognized - Ordinary income
=$1,573 - $1,573
=$0

Hence when Mr. Dirksen sells the asset on January 1 of Year 2 the ordinary income recognized on the sale of asset is $1,573