1. Potomac Corporation wants to sell a piece of machinery that is has used in it
ID: 2541244 • Letter: 1
Question
1. Potomac Corporation wants to sell a piece of machinery that is has used in its business for 10 years. The facts are as follows:
Cash Received from the buyer 40,000
Buyer assumes unpaid note payable on machinery 5,000
Note payable is liability on the machinery
Cost basis 60,000
Accumulated depreciation 40,000
a. What is the amount realized?
b. What is the realized gain?
c. Is the above asset considered Sec. 1250 or 1245 property?
d. If sec. 1245 property then what is the amount of the depreciation recapture? Is this depreciation recapture considered an ordinary gain or a sec. 1231 gain?
e. If sec. 1245 property then is there any remaining gain after any depreciation recapture?
Explanation / Answer
a) Amount Realised Cash Received from Customer 40000 Assumption of Notes payable 5000 Total amount realised is 45000 b) The realised gain Carrying Amount of the asset ( 60000-40000) 20000 Sale Value of assets 45000 Realised Gain 25000 c) Any property which is tangible in nature and is subject to depreciation is known as Sec 1245 propert. Based on the this the details of the assets hows it’s a Sec 1245 property. d) If this is a 1245 property then this is a depreciation recapture. The amount of deprecitaion recapture is 25000. This depreciation recapture is considered as oridinary gain and not special gain e) There is no remaining gain after depreciation recapture as the entire amout s set off against depreciation on the assets.
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