ACCT3201 Tax Return Problem #3 Edgar and Molene Moab are married, do not itemize

Question

ACCT3201 Tax Return Problem #3

Edgar and Molene Moab are married, do not itemize, and Edgar owns a high-tech biking business. Both are under age 65 and have no dependents. They live at 1234 University Drive, Apt. 13, Lawrenceville, GA 30043. Prepare their 2016 tax return.

Forms required: Form 1040

                               Form 4797

                                Schedule D

                                Schedule D worksheet

                                Form 8824 for like-kind exchange

                                Form 6252 for installment sales

Form 4797 is used for the sale of business property. Part III, Form 4797, is used for §1231 assets disposed of at a gain. Part I, Form 4797, is used for non-depreciable §1231 assets [usually land] and §1231 assets disposed of at a loss. Part II, Form 4797, is used for business assets not held for one year. There is an example of Form 4797 and Schedule D on Pages 11-21 to 11-23.

Moab [an unincorporated entity] manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year.

Part (1) Determine the gain/loss realized and recognized in the current year for each of these events. Also determine whether the gain/loss recognized is §1231, capital, or ordinary. Construct a chart to show transactions and gains/loss in good format.

Moab sold a machine that it used to make computerized gadgets for $27,300 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 depreciation.

Moab held stock in ABC Corp. which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year.

Moab sold some of its inventory for $7,000 cash. This inventory had a basis of $5,000.

Moab disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken $15,000 in depreciation.

Moab sold land it held for investment for $28,000. It originally bought the land for $32,000 two years ago.

Moab sold another machine for a note, payable in four annual installments of $12,000. The first payment was received in the current year. It originally bought the machine two years ago for $32,000 and had claimed $9,000 in depreciation expense against the machine.

Moab sold stock it held for eight years for $2,750. It originally purchased the stock for $2,100.

Moab sold another machine for $7,300. It originally purchased this machine six months ago for $9,000 and has claimed $830 in depreciation expense against the asset.

Part (2) From the recognized gains/losses determined in part 1, determine the net §1231 gain/loss and the net ordinary gain/loss Moab will recognize on its tax return. Moab, Inc. also has $2,000 of nonrecaptured §1231 losses from previous years.

Explanation / Answer

answer to part 1

cost=19200,depreciation=8000

WDV=19200-8000=11200

selling price of machine=27300

gain=27300-11200=16100

gain=16100

realised

capital

as it is a capital asset

value at beginning=12000

value at end=15230

diference=3230

gain=3230

recognised(valuation gain)

ordinary

as it is a current asset

cost=5000

selling price=7000

gain=7000-5000=2000

gain=2000

realised

WDV=62000-15000=47000

FAIR VALUE OF BUILDING ACQUIRED=75000

GAIN=75000-47000=28000

GAIN=28000

realised

COST=32000

SELLING VALUE=28000

(land no depreciation)

loss=28000-32000=(4000)

recognised

consideration in notes repayable in installments=12000*4=48000

WDV=32000-9000=23000

gain=48000-23000=25000

gain=25000

recognised

cost=2100

selling price=2750

gain=2750-2100=650

gain=650

realised

WDV=9000-830=8170

selling price=7300

loss=8170-7300=870

Answer to part 2

Therefore net gain or loss in ordinary transactions=3230+2000+650=5880

net gain=5880-nonrecaptures loss=5880-2000=3880

Therefore net gain or loss in capital transactions=16100+28000-4000-25000-870=64230

net gain in acpital transactions=64230$

EVENT WORKING GAIN OR LOSS CAPITAL OR ORDINARY MACHINE

cost=19200,depreciation=8000

WDV=19200-8000=11200

selling price of machine=27300

gain=27300-11200=16100

gain=16100

realised

capital

as it is a capital asset

STOCK

value at beginning=12000

value at end=15230

diference=3230

gain=3230

recognised(valuation gain)

ordinary

as it is a current asset

INVENTORY

cost=5000

selling price=7000

gain=7000-5000=2000

gain=2000

realised

ordinary BUILDING

WDV=62000-15000=47000

FAIR VALUE OF BUILDING ACQUIRED=75000

GAIN=75000-47000=28000

GAIN=28000

realised

capital LAND

COST=32000

SELLING VALUE=28000

(land no depreciation)

loss=28000-32000=(4000)

recognised

capital loss MACHINE

consideration in notes repayable in installments=12000*4=48000

WDV=32000-9000=23000

gain=48000-23000=25000

gain=25000

recognised

capital STOCK

cost=2100

selling price=2750

gain=2750-2100=650

gain=650

realised

ordinary as it is stock the entitys current asset MACHINE

WDV=9000-830=8170

selling price=7300

loss=8170-7300=870

loss=870 capital loss

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