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David Corp. sold machinery for $80,000 on December 31, 2018. This machinery was purchased on January...

David Corp. sold machinery for $80,000 on December 31, 2018. This machinery was purchased on January 2, 2014, for $68,000 and had an adjusted basis of $40,000 at the date of sale. The machinery was used in David Corp. business. For 2018 David Corp. should report: a. Ordinary Income of $12,000 and capital gain of $28,000 b. Ordinary Income of $28,000 and capital gain of $12,000 c. Ordinary Income of $40,000 d. Capital gain of $40,000

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Answer #1

Cost = $68,000

Accumulated depreciation = $68,000 - $40,000 = $28,000

Book value = $40,000

Selling price = $80,000

Recognized gain = $80,000 - $40,000

= $40,000

Ordinary income (up to the amount of depreciation taken) = $28,000

Capital gain = $12,000

The answer is b.

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