Question

In year 0, Javens Inc. sold machinery with a fair market value of $480,000 to Chris. The machinery's original basis was $378,480 and Javens's accumulated depreciation on the machinery was $58,000, so its adjusted basis to Javens was $320,480. Chris paid Javens $48,000 immediately (in year O) and provided a note to Javens indicating that Chris would pay Javens $72,000 a year for six years beginning in year 1. a. What are 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 are 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 Gain: Ordinary Gain $1231 gain

Answer 1

1) Amount and Character of gain:

Original Cost of Machinery = $378,480

(-) Accumulated Depreciation = $58,000

Adjusted value of asset = $ 320,480

Agreed selling price = $480,000

Gains = $159,520

Amount of gains recognised in Year 0 = $ 159,520

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.