esign Layout References Mailings Review View Help Tell me what you want to da Fo

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esign Layout References Mailings Review View Help Tell me what you want to da Font Paragraph PROBLEM 5 (15 points) Tracy started his sole proprietorship business two years ago and has never sold a $1231 asset Tracy owned each of the assets for the entire 2 years he has been in business. In the current year, he sold the following business assets: Accumulated DepreciationGain/Loss Original Cost Asset Desks Truck Equipment Building $8,000 (S2,000) 18,000 150,000 6,000 12,000 10.000 13,500 25,000 Assuming Tracy's marginal ordinary income tax rate is 30 percent, what is the character of Tracy's gains and/or losses for the current year? What effect do the various gains or losses have on Tracy's tax liability? to search

Explanation / Answer

Ans. Any asset that is not consumed or sold during the normal course of business is commonly known as fixed assets such as land, buildings, equipment, machinery, vehicles, leasehold improvements, and other such items. Fixed assets enable their owner to carry on its operations. In accounting, fixed does not necessarily mean immovable; any asset expected to last, or be in use for, more than one year is considered a fixed asset.

If any person sells the fixed assetsthe gain/loss arising on those assets will be of captial nature, commonly know as capital gain/loss. Further capital gain has two parts short term capital gains and long term capital gains, any gain which is arising on sale of fixed assets which is held for less than 36 months will be considerd as short term capital gains.

In the given case Tracy is selling Desks, Truck, equipment and building etc. which can be classified as fixed assets and gain or loss arising on sale of these assets will be the capitai gain/loss.

Calculation of capital gain/(loss) : in ($)

Capital gain/(loss) on Desks (2000)

Capital gain/(loss) on Truck (6000)

Capital gain/(loss) on Equipment 13500

Capital gain/(loss) on Building 25000

______

Capital gain/(loss) for the year 30500

______

Short term capital gains arising on the sale of short term capital assets (except for the share and securities) will be taxed at At individual’s tax slab rate which is 30% in the given case. Therefor the amount of $30500 will be taxable @30% for the current year after applying the basic exemption limit.

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