Question

Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. In 2018, she sells the following long-term assets used in her business:

Asset	Sales Price	Cost	Accumulated Depreciation
Building	$234,600	$204,600	$56,600
Equipment	84,600	152,600	27,600

Lily's taxable income before these transactions is $165,100.

What are Lily's taxable tax liability for the year? Use Tax Rate Schedule for reference.

Che 5 Problem 11-48 (LO 11-3, LO 11-4, LO 11-5) Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. In 2018, she sells the following long-term assets used in her business: points Accumulated Sales Price $234,600 Cost Depreciation Asset Building Equipment eBook $56,600 27,600 $204,600 Print 84,600 152,600 References Lily's taxable income before these transactions is $165,100 What are Lily's taxable income and tax liability for the year? Use Tax Rate Schedule for reference. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Description Taxable income Tax liability Amount $ 211,300

Answer 1

Solution

Lily Tucker

1. Computation of taxable income –

Gain on sale of building:

Sale proceeds – book value

Book value = cost – accumulated depreciation

= $204,600 - $56,600 = $148,000

Sale proceeds = $234,600

Gain on sale = 234,600 – 148,000 = $86,600

Loss on sale of equipment –

Sale proceeds – book value

Book value = cost – accumulated depreciation

Book value = 152,600 – 27,600 = $125,000

Sale proceeds = $84,600

Loss on sale = 84,600 – 125,000 = ($40,400)

Taxable income –

Taxable income before the transactions          $165,100

Add: gain on sale of building                         $86,600

Less: loss on sale of equipment                       ($40,400)

Net taxable income                                         $211,300

Computation of tax liability –

Since the taxable income is between $200,000 and $500,000 the applicable tax is as follows.

$45,689.50 + 35% x excess of 200,000

= 45,689.50 + 35% x (211,300 – 200,000)

= 45,689.50 + 35% x 11,300

= 45,689.50 + 3,955

Hence, tax liability = $49,644.50