In July of 2009, Mr. Mann, a sole proprietor who performs excavating services, p

Question

In July of 2009, Mr. Mann, a sole proprietor who performs excavating services, purchased and put to use for business a piece of heavy equipment for $36,500. This piece of equipment was depreciated using the MACRS 150% DB method of depreciation over the useful period of 7 years. No salvage value was approximated and applied to the appreciable basis of this equipment. Freight and installation charges for this equipment totaled $1500. Mr. Mann sold this piece of equipment for $31,500 in June of 2011.

For this task, define capital asset and discuss the purpose of depreciation of assets, and why depreciation directly affects valuation of the asset at disposal. Based on the information provided, determine the amount of capital gain or loss Mr. Mann incurred through this transaction. Be certain to detail your calculations for depreciating the equipment, and how this impacts the capital gain or loss associated with the disposal of this capital asset. Explain how any gain on this asset will impact the tax obligation for Mr. Mann as the proprietor.

Explanation / Answer

Solution.

A capital asset is a type of asset that is not easily sold in the regular course of a business's operations for cash and is generally owned for its role in contributing to the business's ability to generate profit. Furthermore, it is expected that the benefits gained from the asset will extend beyond a time span of one year. On a business's balance sheet, capital assets are represented by the property, plant and equipment figure

Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are buildings, furniture, leasehold improvements, and office equipment. The only exception is land, which is not depreciated (since land is not depleted over time, with the exception of natural resources). The reason for using depreciation is to match a portion of the cost of a fixed asset to the revenue that it generates; this is mandated under the matching principle, where you record revenues with their associated expenses in the same reporting period in order to give a complete picture of the results of a revenue-generating transaction. The net effect of depreciation is a gradual decline in the reported carrying amount of fixed assets on the balance sheet.Depreciation is directly effect valuation of asset at the time of disposal. Depriciated amount subtract from Asset book value rthan balance amount is the amount of disposal book value.

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