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On August 1 of year 0, Dirksen purchased a machine for $28,250 to use in its business. On December 4 of year 0, Dirksen sold the machine for $22,500. (Use MACRS Table.) (Loss amounts should be indicated by a minus sign. Do not round percentages used for calculations. Leave no answer blank. Enter zero if applicable.) https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/spilker_7e/table_1.jpg
a. What is the amount and character of the gain or loss Dirksen will recognize on the sale?
Total gain/(loss) recongized
Character of Recognized gain/(loss)
ordinary gain/(loss)
1231 gain/(loss)
b. What is the amount and character of the gain or loss Dirksen will recognize on the sale if the machine is sold on January 15 of year 1 instead? Loss amounts should be indicated by a minus sign. Do not round percentages used for calculations. Round other intermediate computations to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.
Total gain/(loss) recongized
Character of Recognized gain/(loss)
ordinary gain/(loss)
1231 gain/(loss)
Expert Answer
| a. Original basis(Purchase cost) | 28250 |
| Less: Acc.depn. | 0 |
| Adjusted basis | 28250 |
| Amt.Realised on sale | 22500 |
| Recognised loss(amt.realised-Adjusted Basis) | -5750 |
| a. Machine placed in service & sold in the same tax-year |
| So, no depreciation is allowed & |
| It is not a 1231 asset as it is held for less than a year |
| Character– Ordinary loss of amount 28250-22500= $ 5750 |
| In any case ,as the machine is sold at a realized loss, there is no depreciation recapture–which is also 0 |
| So, Total loss recognised = $ 5750 |
| b. Depreciation calculation | ||
| MACRS % | Depn. Amt. | |
| Year 0 | 14.29% | 4037 |
| Year 1– 24.49%*1/2 | 12.25% | 3459 |
| (Half-yr. depn. In the year of sale) | ||
| Total acc.depn. | 7496 |
| Original basis(Purchase cost) | 28250 |
| Less: Acc.depn. | 7496 |
| Adjusted basis | 20754 |
| Amt.Realised on sale | 22500 |
| Recognised gain(amt.realised-Adjusted Basis) | 1746 |
| Depn. Recapture | |
| lesser of the realized gain of 1746& accumulated depreciation 7496,ie. | |
| & Treated as Ordinary Income/gain | 1746 |
| ANSWER: | ||
| Total gain recongized | 1746 | |
| Character of Recognized gain | Ordinary | M/c held for less than a year |
| ordinary gain/(loss) | ||
| 1231 gain/(loss) | Nil | |
a.
| No depreciation is calculated for MACRS asset placed in service and disposed of in the same year, in accordance with IRS Publication 946 |
| a. Original basis(Purchase cost) | 28250 |
| Less: Acc.depn. | 0 |
| Adjusted basis | 28250 |
| Amt.Realised on sale | 22500 |
| Recognised loss(amt.realised-Adjusted Basis) | -5750 |
| Depn. Recapture | 0 |
| Treated as Ordinary loss(lesser of -5750 &0) | -5750 |
| ANSWER: | |
| Total loss recongized | -5750 |
| Character of Recognized loss | Ordinary |
| ordinary loss | |
| Not a 1231 asset | |
| (as Held for less than a year) |
