Question

14 Required Information [The following information applies to the questions displayed below.] Part 1 of 3 Moran owns a building he bought during year 0 for $190,000. He sold the building In year 6. During the time he held the building he depreciated it by $32,500. What is the amount and character of the gain or loss Moran will recognize on the sale in each of the following alternative situations? (Loss amounts should be indicated by a minus sign. Enter NA If a situation is not applicable. Leave no answer blank. Enter zero if applicable.) a. Moran received $175,000. Description Amount Total Gain/(Loss) Recognized INA Remaining $1231 gain (loss)

Answer 1

As per the law, if the amount received on sale of property is more than the carrying cost in the books, the difference is to be recognised as income/Capital gains.

Excess amount of sale value over the carrying cost to the extent of Deprication charged throughout the life of asset will be classified as ordinary income and taxed on ordinary tax rates. However the amount in excess of original cost of asset will be classified as capital gains and will be taxed at capital gains rate.

In the current situation,

Cost of building = 190,000

Deprication charged = 32,500

Carrying value of building in books = 157,500

Part A.

Sale value = 175,000

Difference of sale value and carrying value = 17,500 ( 175000-157500)

Gains to the extent of Deprication charged will be considered as ordinary income as Deprication recapture.

Solution : Ordinary income (Deprication recapture) 17,500

Part B.

Sale value = 228,000

Total gain = 70,500 ( 228,000 - 157,500)

Solution:

Ordinary income ( Deprication recapture) = 32,500

Capital gain = 38,000 (Gains over the original cost of assets = 228,000 -190,000)

Part C.

Sale value = 156,000

Gain/(loss) = (1500)

Solution : Loss - 1500