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. Leave no answer blank. Enter zero if applicable.) a. What is the amount and character of the gain or loss Canon will recognize on the sale, assuming that it is a partnership? Description Amount Total Gain/(Loss) Recognized $ 18,000 Character of Recognized Gain/(Loss): 18,000 Ordinary Gain/(Loss) $ $1231 gain/(loss) $

Answer 1

Answer;

$ 18,000 Ordinary Income computed as Follows ;

Description	Amount
(1) Amount Realized	$ 42,000 Given
(2) Orginal Basis	$ 56,000 Given
(3) Accumulated Depreciation	$ (32,000) Given
(4) Adjusted Basis	$ 24,000 (2) + (3)
(5) Gain / (Loss) Recognized	$ 18,000 (1) - (4)
(6) Ordinary Gain /( Loss )	$ 18,000 Lessor of (3) or (5)
§ 1231 gain / Loss	0 (5) - (6)

Because the entire gain is caused by depreciation deduction the entire gain is treated as ordinary income.