[helen2012cpa]

Decker sold equipment for 200,000$. The equipment was purchased for 160,000 and had accumulated depreciation of 60,000$. What amount is reported as an ordinary income under code sec 1245? (2011 AICPA released question #10)

a) $ 0

b) $ 40,000

c) $ 60,000

d) $ 100,000

The correct answer is C. In my understanding, we should report an ordinary income the lesser of gain recognized (40,000) or depreciation recaptured (60,000). so B should be the answer. What am i missing here?

[skintapeup]

I think you are correct and maybe there is an error in the question? Maybe they meant Section 1250 since it is the difference in the 2 depreciation methods.

[helen2012cpa]

Skintapeup, i think i was wrong in understanding how recognized gain is calculated it should be selling price – adjusted base which is 200,000 – 100,000 (160,000 – 60,000)which is 100,000 so the lesser from 100,000 or 60,000 is recognized as an ordinary income…..

[skintapeup]

Yea that makes sense

[Anonymous]

Purchased 160000

Dep 60000

AB 100000

Sale 200000

AB 100000

Realized Gain 100000

Ordinary Income 60000

1231 Gain 40000

Just a quick copy paste from Excel. I subtracted depreciation from my purchase price to get the adjusted basis. Then, subtracted the adjusted basis from the sale price to find my realized gain. Ordinary Income will be the full amount of the depreciation with the remainder as a 1231 Gain.

Hopefully this helps…

I'm on my 15 minute break and my brain is fried.

[Author]

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